South Korea under pressure: interest rate cut in response to Trump's trade threats

In South Korea, concerns are growing that Donald Trump's trade policy will put a strain on the economy. The country's central bank cut its key interest rate by a quarter of a percentage point to 2.75 percent on Tuesday, citing lower expectations for economic growth this year. The export nation in the Far East is highly dependent on exports of cars from manufacturers Hyundai and Kia, semiconductors and electronics from major corporations Samsung, SK Hynix and LG, and steel. Trump has threatened punitive tariffs on all of these business areas, and in turn countermeasures could threaten in large sales markets such as China.

The Bank of Korea has lowered its growth forecast for the current year from 1.9 percent expected in November to just 1.5 percent. This latest forecast is well below the average annual growth of 2.5 percent over the past ten years. In a press conference in Seoul on Tuesday, Bank of Korea Governor Rhee Chang-yong cited Trump's protectionist measures as a factor that contributed to the worsened forecasts.

"The profile of Trump's tariff policy has now largely become clear, and that has been the reason for the downgrade since January," said Rhee. The lower interest rates are expected to help revive Asia's fourth-largest economy. Rhee indicated that further easing measures would follow this year. Market expectations of two to three rate cuts this year correspond to the Bank of Korea's views. However, the central bank governor pointed out that only two of the six members of the central bank's council were in favor of another rate cut in the next three months.

The threatened tariffs are weighing on the share prices of important Korean companies. Shares in Hyundai, which together with its subsidiary Kia is the third largest car manufacturer in the world behind Toyota and Volkswagen, have fallen by a fifth since the autumn. The steel company Posco has suffered a similarly steep decline. LG Electronics has lost 15 percent of its value.

In addition to the tariff threat from Washington, the political turmoil in South Korea is also weighing on the country's economy. In December, President Yoon Suk-yeol unexpectedly imposed martial law for a short time, thereby significantly damaging the markets' confidence in the country. The exchange rate of the Korean won to the dollar fluctuated considerably in the weeks that followed. However, the fluctuations have since become less pronounced. The impeachment proceedings against Yoon are still ongoing. On Tuesday, however, central bank governor Rhee pointed to weak private consumption and a decline in construction activity, which, together with poor consumer confidence, had contributed to the central bank lowering its forecast.

The governor reiterated earlier statements that the government must intervene with additional spending to support growth and warned against relying on monetary policy alone to stimulate the economy. Last week, incumbent President Choi Sang-mok presented an emergency strategy for South Korea's export economy. He spoke of a tariff war by the Trump administration and "increasing uncertainty on the export front". Aid worth a total of 366 trillion Korean won (244 billion euros) should help small and medium-sized companies in the semiconductor industry in particular to maintain their exports despite higher tariffs and trade restrictions.