(Photo : BTIN)
- South Korea's central bank, the Bank of Korea (BOK), has unexpectedly cut its benchmark interest rate to revive economic growth amid slowing exports and uncertainties from the new U.S. administration.
- The decision indicates the need to boost the economy outweighed concerns over foreign exchange market volatility and high household debts.
- The global economy faces uncertainties surrounding growth and inflation, influenced by U.S. policies, changes in major economies' monetary policies, and geopolitical risks.
- The geopolitical landscape is changing, with no single country or group of countries able to effectively tackle global challenges, impacting the global financial landscape.
In a surprising move, South Korea's central bank, the Bank of Korea (BOK), has slashed its benchmark interest rate for the second consecutive session. This decision, made during a rate-setting meeting in Seoul, is a clear indication of the bank's policy focus on reviving economic growth momentum amid slowing exports and uncertainties stemming from the new Donald Trump administration. The key rate was cut by 25 basis points to 3 percent, marking the first rate reduction since May 2020 and the first pivot since August 2021.
This decision came as a surprise to many analysts who had expected the BOK to hold the key rate unchanged in November. The Korean won has slumped markedly in recent weeks and has stayed around the closely watched level of 1,400 won per dollar. The country continues to face lingering concerns over high household debts. However, the rate decision indicates that the need to revamp the sagging economy outweighed the need to address the volatility in the foreign exchange market and high household debts for the central bank.
The BOK stated, Although volatility of the exchange rate has increased, inflation stabilization has continued, along with an ongoing slowdown in household debt, and downward pressure on economic growth has intensified.
Global Economy and Trump's Influence
The global economy has been facing heightened uncertainties surrounding growth and inflation, driven by the new U.S. administration's policies. The global economy and financial markets will be influenced by the specifics of the new U.S. administration's policies, by changes in monetary policies in major economies, as well as by geopolitical risks.
The BOK also lowered its outlook for South Korea's economic growth in 2025 to 1.9 percent from its earlier projection of 2.1 percent. It also slashed the forecast for this year from 2.4 percent to 2.2 percent. The projection for next year comes below the country's potential growth rate of 2 percent and is bleaker than the International Monetary Fund's forecast of a 2.2 percent expansion.
South Korea has seen slower growth in exports, a key growth engine, in recent months. Exports rose 4.6 percent from a year earlier to $57.5 billion in October, marking the 13th straight monthly gain, but it was the smallest increase since March, according to government data.
Geopolitical Landscape and Future Challenges
In the geopolitical landscape, the US still holds the reins in military and financial power, but Trump seems uninterested in taking on a global leadership role. This brings us to what political analyst Ian Bremmer calls a "G-Zero world," where no single country - or group of countries - can effectively tackle the global challenges we face. We're heading into an era where no one seems ready to step up and establish order. Nor is anyone taking the lead on critical issues like climate change, AI regulation, global health, or conflict resolution.
The projection for next year comes below the country's potential growth rate of 2 percent and is bleaker than the International Monetary Fund's forecast of a 2.2 percent expansion. The geopolitical landscape is also changing, with no single country or group of countries able to effectively tackle the global challenges we face. This complex interplay of economic and geopolitical factors will continue to shape the global financial landscape in the coming years.