🚨 Interest Rate Cut Coming: 90% of Experts Expect "This Week Implementation", Economic Recovery Signal
Today Korean Economic News | 2025.05.26
📌 Bank of Korea Plays Interest Rate Cut Card After First Quarter Negative Growth, Hopes for Domestic Economy Boost
💬 9 out of 10 Korean economists expect the Bank of Korea to cut the base interest rate from 2.75% to 2.50% (a 0.25 percentage point cut) on May 29th. The main reasons are the first quarter's -0.2% negative growth, long-term domestic economic slowdown, stable prices, and stable exchange rates. Experts predict additional cuts will continue until the end of the year, bringing the base rate down to 2.00-2.25%. This interest rate cut is expected to help recover the sluggish domestic economy and reduce household debt interest burdens.
1️⃣ Easy Understanding
Finally, the Bank of Korea is getting ready to lower interest rates. Most economic experts expect interest rates to go down this week, so many people are watching with interest.
First, let me explain what the "base interest rate" is in simple terms. The base interest rate is the basic rate set by the Bank of Korea. All financial institutions use this rate to decide their loan rates and deposit rates. It's like a water gate that controls water levels - when rates go up, less money flows in the economy, and when rates go down, more money flows.
The current base rate is 2.75%, but experts expect it to be lowered to 2.50% (a 0.25 percentage point cut). This might seem like a small difference, but it's actually a very big change. For example, someone with a 100 million won loan would save about 250,000 won per year in interest.
Why does the Bank of Korea want to lower interest rates? The biggest reason is that Korea's economy has become difficult. Korea's economic growth rate in the first quarter was -0.2%, which is negative. This means Korea's economy actually got smaller compared to last year, which is a very serious signal.
The domestic economy is especially struggling. People are spending less money, and companies are hesitant to invest, making the whole economy shrink. High interest rates make it hard to get loans, so it's difficult to buy houses, and companies are delaying business expansion.
Fortunately, prices are becoming stable. Prices that rose too much last year have now fallen to around 2%, giving the Bank of Korea room to lower interest rates. Also, the won-dollar exchange rate is relatively stable, so lowering interest rates shouldn't cause major problems.
When interest rates go down, there are many good effects. First, loan interest burdens decrease, making household finances better. Second, companies can borrow money more easily, which can increase investment and employment. Third, the real estate market can become active again.
Experts expect interest rates to fall further by the end of this year, reaching 2.00-2.25%. This would be the lowest level since the COVID-19 pandemic and is expected to greatly help economic recovery.
The interest rate cut will be an important signal to bring life back to our struggling economy.
2️⃣ Economic Terms
📕 Base Interest Rate
The base interest rate is the policy rate set by the Bank of Korea and serves as the standard for all other interest rates.
- This is the rate the Bank of Korea uses when lending money to or receiving money from financial institutions.
- All loan rates and deposit rates in the market are decided based on this base rate.
- It's decided by the Monetary Policy Committee, which meets 8 times per year, and adjusted according to economic conditions.
📕 Domestic Economy
The domestic economy refers to the overall situation of consumption and investment activities within the country.
- It includes household consumption, business investment, and government spending.
- It's the opposite concept of exports and shows the basic strength of the domestic economy.
- The stronger the domestic economy, the more resistant the economic structure is to external shocks.
📕 Monetary Policy Committee
The Monetary Policy Committee is the Bank of Korea's highest decision-making body that decides the base interest rate.
- It consists of the Bank of Korea Governor, Deputy Governor, and 4 committee members.
- It holds 8 regular meetings per year to decide monetary policy direction.
- Besides deciding the base rate, it also controls money supply and financial stability.
📕 Monetary Policy
Monetary policy is the Bank of Korea's policy to control interest rates and money supply for economic stability.
- When the economy overheats, rates are raised to cool it down; when it slows down, rates are lowered to stimulate it.
- The goals are price stability, economic growth, and financial stability at the same time.
- Together with fiscal policy, it's a core tool for managing the national economy.
3️⃣ Principles and Economic Outlook
✅ Background of Interest Rate Cut: Economic Recession and Policy Change
Let's analyze the economic background that led the Bank of Korea to consider an interest rate cut.
First, the first quarter's negative growth is acting as a decisive factor for the interest rate cut. Korea's economy recorded -0.2% negative growth in the first quarter of this year, increasing the need for economic stimulus. This is the most sluggish growth rate since the COVID-19 shock in 2020, showing that domestic economic stagnation is at a serious level. Private consumption especially decreased by 0.8% compared to the previous quarter, clearly showing weakened household spending power. Equipment investment also fell -2.1%, continuing its decline for the third consecutive quarter, showing that corporate investment sentiment has greatly weakened. The Bank of Korea believes monetary policy easing is unavoidable for economic recovery. High interest rates are acting as a major factor suppressing consumption and investment, so they expect economic stimulus effects through interest rate cuts.
Second, stable prices are creating conditions for interest rate cuts. The consumer price inflation rate in April was 2.9%, staying below 3% for three consecutive months, easing inflationary pressure. Service price inflation is especially slowing down, showing that core inflation is stabilizing. Oil and raw material prices are also relatively stable, so price increase pressure is not significant. Prices are falling to levels close to the Bank of Korea's target 2% inflation rate, creating an environment where interest rates can be cut without worrying about prices. This is clearly different from the inflation rate that exceeded 5% until the second half of last year, allowing monetary policy focus to shift from price suppression to economic stimulus.
Third, exchange rate stability and global interest rate cut trends are expanding policy room. The won-dollar exchange rate is moving relatively stably at the 1,350-1,380 won level, reducing concerns about rapid exchange rate increases due to interest rate cuts. Foreign exchange reserves are also maintained at around $410 billion, so there are no major problems with external stability. Also, the U.S. Federal Reserve is suggesting interest rate cuts in the second half of this year, reducing the burden of Korea's interest rate cuts. In the past, there were constraints on interest rate policy due to concerns about Korea-U.S. interest rate reversal, but now conditions have been created to participate in the global interest rate cut trend. This improvement in external conditions is increasing the Bank of Korea's policy autonomy.
The interest rate cut is an important signal showing that the Bank of Korea is shifting from price-focused policy to growth-focused policy. Active monetary policy management for economic recovery is expected.
✅ Economic Effects of Interest Rate Cuts
Let's look at the specific impact that base rate cuts will have on each sector of the economy.
First, household debt burden relief and consumption stimulus effects are expected. Currently, household debt exceeds 1,900 trillion won, making interest burden a major pressure factor on household finances. When the base rate falls by 0.25 percentage points, the interest burden for variable-rate borrowers will immediately decrease. A household with a 200 million won mortgage would see annual interest decrease by about 500,000 won. This is expected to lead to increased household disposable income and increase spending power. Especially, purchases of durable goods and service consumption will increase, bringing vitality to the stagnant domestic market. According to Bank of Korea estimates, a 0.25 percentage point cut in the base rate has the effect of increasing private consumption by 0.1-0.2 percentage points.
Second, improved corporate investment conditions and new job creation can be promoted. Lower interest rates will reduce companies' financing costs, and equipment investment and R&D investment are expected to increase. Small and medium-sized companies especially react more sensitively to interest rate changes than large companies, so investment expansion effects are expected to be significant. Manufacturing companies' factory expansion or new technology adoption, and service companies' store expansion could become more active. This will naturally lead to new job creation, helping solve youth employment shortage problems. Looking at past experience, employment improvement effects begin to appear 6 months to 1 year after interest rate cuts. The current unemployment rate of 4.2% could improve to the late 3% range.
Third, real estate market recovery and construction industry normalization are expected. The real estate market, which had been stagnant due to high interest rates, is expected to regain vitality. As mortgage rates fall, actual buyers' home purchasing power will increase. This is especially expected to be a big help for newlyweds or first-time home buyers. The construction industry can also pursue new projects more actively as financing becomes easier. However, the government's policy checks to prevent rapid real estate price increases will continue, so normalization centered on transaction volume increases rather than excessive price rises is expected. The number of construction industry workers will also gradually recover, having a positive impact on related industries overall.
Interest rate cuts are a policy tool that can create a virtuous cycle structure throughout the economy. However, since it takes time for effects to appear, we need to watch patiently.
✅ Future Interest Rate Outlook and Policy Tasks
Let's forecast future interest rate policy direction and economic policy tasks.
First, additional interest rate cuts are expected to continue gradually until the end of the year. Experts forecast that the base rate will fall to 2.00-2.25% by the end of this year. This means an additional 0.50-0.75 percentage point cut from the current 2.75%. The speed of interest rate cuts will be determined by the degree of economic recovery and price conditions. If economic recovery is slower than expected or deflation concerns grow, interest rates might be cut at a faster pace. Conversely, if the economy recovers quickly or prices start rising again, the cutting pace might be adjusted. The Bank of Korea is expected to operate interest rate policy through careful, data-based approaches.
Second, harmonious policy mix with fiscal policy along with interest rate cuts is important. Monetary policy alone has limits for economic recovery, so the government's active fiscal policy must support it. Especially, government-led economic stimulus measures such as support for small business owners and self-employed, youth job creation, and social infrastructure investment are needed. Also, securing long-term growth engines through structural reforms must be pursued simultaneously. Examples include regulatory reform, labor market flexibility, and fostering innovative companies. We need efforts to strengthen economic fundamentals using the time gained from interest rate cuts. Simply lowering interest rates doesn't solve all problems.
Third, careful policy management to minimize side effects is required. Interest rate cuts can have side effects along with positive effects. Representative concerns include rapid asset price increases, household debt growth, and deepening financial imbalances. Therefore, the Bank of Korea must strengthen macroprudential policies along with interest rate cuts. Financial stability must be maintained through mortgage regulations, strengthened stress tests, and financial institution soundness management. Also, inclusive policies must be implemented so that interest rate cut effects don't concentrate only on specific groups or regions. It's important to ensure that ordinary people and small businesses can actually enjoy the benefits of interest rate cuts.
Future interest rate policy will be carefully managed while balancing economic recovery and financial stability. The key is maximizing policy effects while minimizing side effects.
4️⃣ In Conclusion
The Bank of Korea's interest rate cut expected this week is an important policy decision that could become a new turning point for Korea's stagnant economy. In a situation where the shocking result of first-quarter negative growth emerged, the Bank of Korea's shift to active monetary easing policy is evaluated as a timely decision.
Interest rate cuts are not simply changing one number but will bring widespread ripple effects throughout the economy. Households will see reduced loan interest burdens and increased spending power, while companies will find easier financing and can expand investment and employment. The real estate market will also normalize, contributing to construction industry recovery.
However, interest rate cuts are not a cure-all solution. It takes time for effects to appear, and we must guard against side effects like rapid asset price increases or household debt growth. Therefore, the Bank of Korea must carefully balance economic recovery and financial stability while operating policy.
More importantly, structural reforms must be pursued along with interest rate cuts. Korea's fundamental problems like low birth rates and aging population, productivity decline, and lack of innovation capacity cannot be solved with interest rate policy alone. The government must secure long-term growth engines through regulatory reform, labor market flexibility, and new industry development.
Individuals must also wisely use interest rate cut benefits. Rather than using lower rates for excessive borrowing or speculative investment, it's better to use them for actual consumption or productive investment.
Ultimately, this interest rate cut is just the starting point for Korea's economic recovery. Only when government, businesses, and households all work together can we achieve true economic recovery and sustainable growth. We need wise responses that can turn crisis into opportunity.