South Korea’s central bank cuts interest rates to 2.75% despite inflation risks

South Korea’s central bank has lowered its benchmark interest rate to 2.75%, the lowest level since August 2022, to revive a sluggish economy facing political uncertainty.

The Bank of Korea (BOK) announced the 25-basis-point cut on Tuesday, marking its third reduction in four meetings.

The move aligns with economists' expectations and signals a shift in priority from financial stability concerns to economic recovery.

The rate cut comes as South Korea grapples with political turmoil surrounding President Yoon Suk Yeol's impeachment trial. The country’s Constitutional Court is set to hold a final hearing on Tuesday.

Market reaction was immediate—South Korea’s Kospi stock index dipped 0.46%, and South Korea's won weakened by 0.2% to 1,431.3 per US dollar.

Economists anticipate further rate reductions.

Alex Holmes, Asia research director at the Economist Intelligence Unit, told CNBC that the BOK is likely to cut rates at a faster pace.

Initially wary of household debt and an overheated housing market, the central bank has shifted focus following a sharp decline in consumer and business sentiment, exacerbated by political instability.

South Korea’s economy grew just 1.2% in the fourth quarter, the slowest pace in six quarters, dragged down by weak consumption and a struggling construction sector.

Despite concerns over the widening interest rate gap between the US and South Korea, Citi analysts have noted that capital outflows remain limited, minimizing the impact on the country’s financial stability.

In other news, last week, New Zealand’s central bank reduced its benchmark interest rate for the fourth consecutive time, lowering it by 50 basis points to 3.75% on Wednesday.

In its monetary policy statement, the Reserve Bank of New Zealand (RBNZ) cited stable inflation within its 1%-3% target range as a key factor behind the decision.

New Zealand’s inflation rate stood at 2.2% in the fourth quarter of 2024, with price growth declining in seven of the last eight quarters, according to LSEG data.

Similarly, the Reserve Bank of Australia (RBA) also lowered its benchmark rate for the first time in over four years.

Last week, the RBA cut its cash rate to 4.10%, citing progress on controlling inflation but remaining cautious about further easing.