S. Korea cuts key interest rates to 2.5% in May meeting amid sluggish growth concerns

Seoul's central bank has slashed its benchmark lending rate by 25 basis points to 2-point-5 percent to bolster spending and investment.

Our correspondent Lee Soo-jin reports.

South Korea's central bank has lowered its interest rate by 25 basis points, as widely expected, bringing it down to 2-point-5 percent.

The Bank of Korea on Thursday announced the rate cut following the fourth Monetary Policy Committee meeting of the year, citing concerns about sluggish economic growth.

"With inflation continuing to ease and growth expected to slow significantly, the Bank of Korea said it judged an additional rate cut to be appropriate to help ease downward pressure on the economy. The decision was unanimous among Monetary Policy Committee members."

The decision comes after the central bank left rates unchanged in January and April, and lowered them in February.

The decision to slash rates was mainly driven by concerns over weak growth, with domestic demand weighed down by sluggish consumption and a downturn in construction investment.

South Korea’s economy contracted in the first quarter shrinking by zero-point-2 percent on-quarter, a sharp downturn from the central bank's February forecast of zero-point-2 percent growth.

"Domestic demand has remained weak nowadays and overall consumer sentiment remains subdued. Although exports have shown signs of improvement these days, it's clear that without rebound in domestic demand, economic recovery will be difficult in the short term."

The BOK also slashed its GDP growth forecast for this year to zero-point-8 percent from 1-point-5 percent in its latest economic outlook report, which is released four times a year in February, May, August, and November.

This mirrors a downgrade by the state-run Korea Development Institute and major global investment banks, all also projecting just zero-point-8 percent growth as of late April.

The central bank's projection for 2026 was also lowered to 1-point-6 percent, but the outlook for this year's consumer price inflation was maintained at 1-point-9 percent.

The Monetary Policy Committee also had room to cut rates as the Korean won has strengthened to the 1-thousand-3-hundred range against the greenback, after nearing the 1-thousand-5-hundred mark and forcing the committee to hold rates steady last month.

But the move widens the rate gap with the U.S. to 2 percentage points, raising concerns over capital outflow and whether more cuts could fuel home prices and home debt without lifting growth.

"And that’s why the Bank of Korea is emphasizing that while it’s open to further rate cuts to support growth, it will closely monitor both global and domestic conditions before deciding on the timing of its next move.

Lee Soo-jin, Arirang News."