On April 17, 2025, Lee Chang-yong, the Governor of the Bank of Korea, addressed a press conference at the Bank of Korea's headquarters in Jung-gu, Seoul, where he expressed deep concerns about the economic outlook for South Korea. The central bank's internal assessment indicated a potential for negative growth in the first quarter, a reflection of poor domestic demand compounded by unexpectedly strong U.S. tariff measures. Lee stated, "It feels like we have suddenly entered a dark tunnel," highlighting the gravity of the situation.
The Bank of Korea (BOK) revealed that as of April 10, the median forecast for Korea's economic growth rate among approximately 40 major investment banks and market participants is 1.4%, with the lower 25% estimating it at 1.1%. This downward revision underscores a significant shift in expectations, especially considering the earlier forecast of 1.5% made in February.
During the press conference, Lee emphasized that if the growth rate falls sharply, the BOK would need to implement aggressive interest rate cuts to stimulate the economy. However, he cautioned that the room for such maneuvers is limited. The rising tariffs contribute to inflationary pressures, and if the gap between Korea's and the U.S.'s benchmark interest rates widens further, it could lead to capital flight and exacerbate the depreciation of the Korean won.
Lee noted that the overall economic downturn could also impact real estate prices, particularly if household debt continues to expand. In light of these concerns, five out of six members of the Monetary Policy Committee voted to maintain the current interest rate at 2.75%, reflecting a cautious approach to monetary policy amid these challenging circumstances.
Lee explained that the decision to freeze interest rates was influenced by the need to wait for clearer economic signals. He stated, "We should keep the possibility of interest rate cuts open to respond appropriately to uncertain growth forecasts and market conditions." The market largely anticipates that the central bank will cut rates in the coming month, as delayed cuts could hinder economic recovery.
The recent stabilization of the won-dollar exchange rate has provided some relief to the BOK, but Lee acknowledged that the situation remains precarious. He indicated that the committee's members are acutely aware of the need to balance monetary policy with the potential impacts on inflation and capital flows.
Furthermore, Lee discussed the implications of the upcoming early election scheduled for June 3, 2025. He noted that the timing of the next Monetary Policy Committee meeting, which falls just after the election, raises questions about the feasibility of preemptively lowering interest rates before the new government takes office. Park Hyung-joong, an economist at Woori Bank, commented that the new administration is likely to pursue aggressive fiscal policies post-election, which may further influence the BOK's monetary stance.
In terms of fiscal policy, Lee expressed optimism about the proposed supplementary budget, which he believes could help defend against the economic downturn. He stated, "The supplementary budget is both important in quantity and content," projecting that the execution of a necessary supplementary budget plan of 12 trillion won could increase the annual economic growth rate by about 0.1 percentage points.
However, he refrained from specifying the appropriate size of the supplementary budget, indicating that the situation has stabilized enough to avoid excessive fiscal intervention. Lee remarked, "Now that the situation has passed, I think it is not appropriate to mention the right size of the supplementary budget."
Looking ahead, Lee warned of the ongoing uncertainties stemming from the U.S.-China trade tensions and the evolving tariff policies. He noted that these external factors present significant variables that South Korea cannot control, complicating the economic landscape further. He described the current environment as one where it is challenging to set a basic scenario for future growth due to rapid changes in U.S. tariff policies and responses from major economies.
Lee's comments reflect a broader concern about how external pressures could hinder domestic recovery efforts. He stated, "The biggest change among policy conditions since the February monetary policy direction is that import conditions have deteriorated greatly, and uncertainty has increased unprecedentedly." He acknowledged that the earlier growth forecast was overly optimistic, given the current realities.
In conclusion, the BOK's cautious approach to monetary policy, coupled with the anticipated supplementary budget, aims to navigate the turbulent economic waters ahead. As the nation prepares for the upcoming election, the interplay between fiscal and monetary policies will be crucial in shaping South Korea's economic trajectory in the months to come.
