The Bank of Korea (BOK) cut its benchmark interest rate by 25 basis points to 2.50% on Thursday, citing weakening growth and easing inflationary pressure. The central bank also lowered the interest rate on its Bank Intermediated Lending Support program from 1.25% to 1.00%, effective immediately.

In its policy statement, the BOK revised its 2025 GDP growth forecast down to 0.8%, a sharp downgrade from its February estimate of 1.5%. The forecast downgrade reflects the Korea Development Institute’s (KDI) move two weeks ago. While acknowledging that household lending and foreign exchange volatility remain elevated, the board determined that disinflationary trends and sluggish domestic demand, particularly in consumption and exports, warranted additional monetary support.

WHY IT MATTERS

The BOK’s rate cut is a clear admission that economic deterioration now outweighs financial stability concerns. By easing interest rates despite continued household debt growth and currency market volatility, the central bank has accepted higher financial risk in exchange for a narrow chance at boosting domestic demand. A 0.8% growth forecast, especially after the KDI’s similar assessment two weeks ago, signals that the economy is stagnant.

That domestic stagnation now collides with a radically altered external landscape. Just hours before the BOK’s announcement, a U.S. federal court struck down the legal foundation of Trump’s sweeping tariff regime, suspending the very measures that had defined South Korea’s trade negotiations strategies over the past few months. While the ruling removes external pressure, it also eliminates the structure around which Seoul had been building its negotiating strategy.

With the snap presidential election just days away, South Korea must now recalibrate its entire macroeconomic strategy amid legal uncertainty in Washington, fading global demand and a fragile domestic recovery. With fiscal measures losing their effectiveness and trade outlook uncertain, Thursday’s rate cut will likely offer only a limited reprieve.