Interest rate cut blocked by High exchange rates…April freeze outlook overwhelming

Bank of Korea expected to maintain rate freeze due to high exchange rate (Source: KBS)

There is a strong forecast that the Bank of Korea will likely maintain the base rate at the current 2.75% at the Monetary Policy Meeting on the 17th. The main factor is concerns about the weakening of the Korean won due to the widening interest rate gap with the U.S. In a situation where the financial market instability is worsening, such as the recent breakthrough of the 1,480 won mark in the won/dollar exchange rate due to President Trump's mutual tariff policy, it is evaluated that it is difficult for the Bank of Korea to lower the rate.

A survey of six economic experts also predicted a freeze. Jo Young-moo, a researcher at LG Economic Research Institute, pointed out that “the current exchange rate is excessively high, making it difficult for the Bank of Korea to lower the rate immediately,” while Kim Hyun-tae, a researcher at Financial Research Institute, and Ahn Jae-kyun, a researcher at Shinhan Investment, also analyzed that “it is burdensome to lower the rate in a situation where exchange rate volatility has become excessively large.”

The tariff storm from the U.S. is hitting not only the foreign exchange market but also the overall domestic economy. In addition to exchange rates, the increase in household loans, real estate market instability, and yet undefined supplementary budget are intertwined complex variables, so it seems the Monetary Policy Committee will make a cautious choice.

However, experts believe there is a high possibility of a rate cut at the May Monetary Policy Committee meeting a month later. This is because the domestic growth rate in the first quarter is likely to record a negative and the Bank of Korea's annual growth forecast is expected to be revised downward. There is also analysis suggesting that following the May cut, a total of up to three or four rate cuts may be made until the latter half of the year.

In fact, some experts are placing weight on the possibility of the year-end base rate going down to 2.00~2.25%. If the timing or scale of the supplementary budget execution is minimal or U.S.-China trade friction continues, it is judged that the Bank of Korea has no choice but to rely more on monetary easing measures.

However, if the exchange rate soars again to threaten the 1,500 won mark, the rate cut card may also be difficult to use easily. As long as the instability in the foreign exchange market is not resolved, the Bank of Korea's policy response is inevitably limited.