South Korea Girds for Trump Tariff Impact With Surprise Rate Cut
(Bloomberg) -- The Bank of Korea ramped up its support for the economy with a surprise interest rate cut as Governor Rhee Chang-yong sounded the alarm over the potential impact of Donald Trump’s return to power on global trade.
Most Read from Bloomberg
In Traffic-Weary Toronto, a Battle Breaks Out Over Bike Lanes
New York City’s ‘Living Breakwaters’ Brace for Stormier Seas
The South Korean central bank lowered its seven-day repurchase rate by a quarter-percentage point to 3% on Thursday, just a month after starting a long-awaited policy pivot to shore up economic growth. Only four of 22 economists surveyed by Bloomberg forecast the back-to-back cut while the remaining 18 expected a hold.
The BOK cited the likely policies of the incoming US administration as a factor driving heightened uncertainties for the global economy in its post-decision statement. It also lowered its growth forecast for 2025 below 2% and trimmed its projection for this year.
“Our decision can be interpreted as an acceleration of easing to deal with downward economic risks that are growing larger than we expected,” Rhee said at a briefing following the decision. “Among the biggest changes since August is the Red Sweep in the US, which was bigger than we forecast,” he said, referring to the comprehensive win by Trump’s Republican party in the election.
The unexpected rate cut initially pushed down bond yields, nudged up stocks and weakened the currency, before some of those moves were pared as market players started to reflect on the longer-term outlook implied by the move.
Rhee said he would work with the government to reduce volatility in the currency market if needed, while adding that the bank did not target any specific levels.
While major central banks have flagged the risks that a change in US administration may entail, the BOK followed through with action as it added to its reputation of moving early on policy. The bank’s decision may help spark an acceleration of easing globally as central bankers across the world look to buffer the impact of Trump’s policies.
Bank of Canada Deputy Governor Rhys Mendes said this week that Trump’s proposed 25% tariffs on the country would hit both economies. European Central Bank Vice President Luis de Guindos cited tariff risk as he said economic concerns have shifted to growth and away from inflation.
Still, Federal Reserve Chair Jerome Powell has said the central bank needs to first see the “timing and substance” of any policy changes and Reserve Bank of Australia Governor Michele Bullock earlier this month warned it was too soon to consider the potential impact of Trump: “We can’t be jumping at sort of shadows.”
During the election campaign, Trump vowed to slap higher tariffs on US trading partners, a factor that would hit South Korea’s export-reliant economy. The president-elect has also touched on a potential rollback of subsidies for foreign companies operating on American soil, such as Samsung Electronics Co. and Hyundai Motor Co., adding to the possible hit for South Korean businesses.
“You should see this as a pre-emptive response to an inevitable slump in investment and consumption should the economy chill next year with Trump targeting US trading partners from China to South Korea,” said Lee Seung-suk, a researcher at the Korea Economic Research Institute, following the rate cut.
The three-year government bond yield dropped to as low as 2.64% and stocks edged up before giving back their gains. The Korean won weakened as much as 0.4% to 1396.35 against the dollar, underperforming most of its Asian peers on Thursday.
Rhee characterized the decision as a tough one and said two out of six board members had voted against the move. Still, that may not act as a brake on further reductions as the governor pointed out that three members are open to another cut in the next three months.
The BOK cut its 2025 growth forecast to 1.9% versus a 2.1% projection in August, a move that likely contributed to what the bank described as an effort to “mitigate downside risks to the economy.”
“If you look at the inflation forecast next year, it’s 1.9% so I think the BOK can easily get down to 2.5%,” said Jeong Woo Park, Nomura Korea Economist speaking to Bloomberg TV’s Stephen Engle and David Ingles. Park correctly forecast Thursday’s rate cut.
“I think eventually it should go down to 2.25% next year,” he added, a view that points to three rate cuts in 2025.
A slowdown in the housing market, a cooling of inflationary pressure and a softening pace of export growth laid the groundwork for Thursday’s cut. Trump’s victory also gave policymakers an incentive to consider ways to shore up South Korea’s trade-reliant economy against tariffs that could spike once he takes office.
“The currently available information suggests that the global economy has been facing heightened uncertainties surrounding growth and inflation, driven by the new US administration’s policies,” the BOK said.
The central bank also noted increased volatility in the currency in its statement and said it would keep a close eye on the won. “It is important to remain cautious concerning the potential for high exchange rate volatility,” the BOK said.
Rhee said the BOK was discussing raising a currency swap arrangement with the national pension fund. He added that the central bank had sufficient means to deal with currency movements if needed.
What Bloomberg Economics Says...
“The rate cut will probably add to pressure on an already depreciating won — a consideration we thought would keep the central bank on hold. The decision indicates the BOK is now prioritizing growth support over short-term currency stability.”
— Hyosung Kwon, economist
For the full report, click here
The decision goes against the BOK’s general stance of refraining from back-to-back rate cuts unless there’s an economic crisis underway. It was the first back-to-back cut since 2009, during the global financial crisis. The move underscores a sense of urgency among board members and shows the BOK is intent on becoming more agile if and when more volatility sweeps across the world economy.
“We believe the BOK front-loaded rate cuts to increase effectiveness of rate cut transmission and reduce downside risks to the domestic demand,” said Bum Ki Son at Barclays Bank, another economist who predicted the cut. “We see this as more of an insurance.”
The concern about the economy is shared by South Korea’s public. Consumers’ economic outlook deteriorated at the fastest pace in more than two years in November, according to a BOK survey released earlier this week.
A slowdown in economic growth may last well into 2026 as export momentum cools, according to BOK forecasts. The bank said Thursday gross domestic product would likely expand 1.8% in 2026 after growing 1.9% next year.
“We cut the rate as we expect a cooling in export gains spreading to the domestic economy,” Rhee said.
--With assistance from Youkyung Lee, Jaehyun Eom, Emily Yamamoto, Kyoji Iwai, Katia Dmitrieva and Denny Thomas.
(Adds more quotes from governor and economists, background throughout.)
Most Read from Bloomberg Businessweek
Musk’s Team of Budget-Slashing MAGA Billionaires Takes Shape
What Happens When US Hospitals Go Big on Nurse Practitioners
©2024 Bloomberg L.P.
