On Friday (November 29), South Korea's KOSPI index plunged by 2% during trading, marking the largest single-day drop in nearly two weeks, reflecting the market's concerns about economic prospects. A day earlier, the Bank of Korea held a Monetary Policy Committee meeting and cut the benchmark interest rate by 25 basis points to 3%. This is the second consecutive month of rate cuts by the central bank, and the first consecutive cuts since 2009.
Weak Economic Growth in South Korea
The rate cut comes against a backdrop of a persistently weak South Korean economy. The latest data shows that South Korea's GDP grew by only 0.1% quarter-on-quarter in the third quarter, far below the market expectation of 0.5%, marking the lowest growth rate in a year. Furthermore, the Consumer Price Index (CPI) rose by 1.3% year-on-year in October, still below the central bank's target of 2% inflation. These figures indicate that the South Korean economy is facing dual challenges of insufficient domestic demand and external pressures.
In its statement on the rate cut, the Bank of Korea emphasized that global economic uncertainties, particularly those arising from the new U.S. administration taking office in January, are one of the important reasons driving this rate cut. The South Korean economy highly relies on exports, and President Trump's tariff policies might impact key export industries like automobiles and semiconductors.
Rate Cut Fails to Boost Market Confidence
Despite the consecutive rate cuts by the Bank of Korea aiming to stimulate economic growth, the market's reaction was tepid. The sharp drop in the KOSPI index reflects investors' concerns about economic prospects. The Bank of Korea also lowered its economic growth forecasts for this year and next, to 2.2% and 1.9% respectively, further exacerbating market pessimism.
Analysts' Views on Future Policy
Barclays economists stated that they were not surprised by the consecutive rate cuts from the Bank of Korea. They see it as a necessary move to mitigate economic risks. Barclays has also brought forward its previously expected timeline for rate cuts in 2025 and 2026 to May and October 2025, indicating a cautious outlook on South Korea's economic recovery prospects.
Overall, South Korea's economy is facing a complex situation of both internal and external pressures. Although the central bank's rate cuts provide some support to the economy, both policy measures and market forces will need to work together to genuinely enhance growth expectations and market confidence.
