Korea’s Central Bank Cuts Rates as Growth Forecast Shrinks

Intermediate | June 8, 2025

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Why Did Korea’s Bank Lower Interest Rates? (Bank of Korea interest rate cut)

What Did the Bank of Korea Decide? (Bank of Korea interest rate cut)

Let’s talk about some big economic news from South Korea. The country’s main bank, called the Bank of Korea (BoK), recently made an important decision. On May 29th, they decided to lower the main interest rate. Think of the interest rate as the cost of borrowing money. So, they made borrowing a little cheaper.

Why Are They Cutting Rates Now?

Why did they do this? Well, the main reason is that the economy isn’t growing as fast as they thought it would. The BoK also updated its forecast for how much the economy will grow this year. They now expect it to grow only 0.8%. This is a big drop from their earlier idea of 1.5% growth back in February. The Bank of Korea interest rate cut is meant to support this slower-than-expected growth.

What Is Going On with the Economy?

This new, lower forecast comes after the Korean economy actually got a little smaller in the first three months of the year (the first quarter). That’s called an economic contraction, and it’s not a good sign. It means the total amount of goods and services produced went down slightly.

What Are the Main Reasons for the Slowdown?

There are a few reasons why growth is slowing down. One big factor is that people aren’t spending as much money. Also, businesses are investing less. Another challenge comes from outside the country: slower growth in exports, partly because of new taxes on goods (tariffs) from the United States. The head of the BoK even said these tariffs have “significantly increased” the slowdown in exports.

What About Inflation?

The good news is that prices aren’t rising too quickly. Inflation, which is how fast prices are increasing, has stayed pretty stable and close to the bank’s goal of 2%. Because inflation isn’t a big worry right now, the Bank of Korea felt it could cut interest rates to try and help the economy grow.

Will This Help the Economy Recover?

This is the fourth time the BoK has cut rates since last October. Lowering interest rates usually encourages people and businesses to borrow and spend more, which can help the economy pick up speed. The bank hopes this move will give the economy a needed boost. This Bank of Korea interest rate cut is a strategic step to encourage spending and borrowing.

The BoK isn’t ruling out more rate cuts if the economy continues to struggle more than expected. Economic experts are watching closely to see if this rate cut and potential future ones will be enough to help South Korea’s economy bounce back and achieve stronger growth later this year or next.

Vocabulary

Central Bank (noun): An institution that manages a country’s currency, money supply, and interest rates.
*Example: “The Bank of Korea is the central bank of South Korea.”
Interest Rate (noun): The cost of borrowing money, shown as a percentage.
*Example: “When the central bank lowers the interest rate, borrowing becomes cheaper.”
Cut (verb): To reduce something, like a price or rate.
*Example: “The bank decided to cut interest rates by 0.25%.”
Growth Forecast (noun): A prediction of how much a country’s economy will grow in the future.
*Example: “They lowered the growth forecast because the economy was weak.”
GDP (Gross Domestic Product) (noun): The total value of goods and services produced in a country in a specific time period.
*Example: “Korea’s GDP growth was slower than expected this quarter.”
Contract (verb): To become smaller in size or amount. In economics, it means the economy shrinks.
*Example: “The economy contracted in the first quarter.”
Inflation (noun): A general increase in prices and decrease in the purchasing value of money.
*Example: “High inflation means things are getting more expensive.”
Tariffs (noun): Taxes on imported goods.
*Example: “New tariffs can make imported products more expensive.”
Domestic Demand (noun): The total demand for goods and services within a country.
*Example: “Weak domestic demand means people are not buying many things.”
Export Growth (noun): An increase in the amount of goods and services a country sells to other countries.
*Example: “Export growth slowed down due to global economic conditions.”

Discussion Questions (About the Article)

What is the main news story about the Bank of Korea?
How much did the Bank of Korea lower the interest rate?
What was the original growth forecast for 2025, and what is it now?
According to the article, why did the Korean economy contract in the first quarter?
Why does stable inflation give the central bank more freedom to cut rates?

Discussion Questions (About the Topic)

How do interest rates affect everyday life for people and businesses?
Why is economic growth important for a country?
What are some other things a government can do to help a struggling economy besides changing interest rates?
How might global events, like trade policies in other countries, affect a country’s economy?
Do you think lowering interest rates is always a good way to boost the economy? Why or why not?

Related Idiom

“Give something a shot in the arm”
Meaning: To boost, encourage, or revitalize something that is weak or slowing down.
Example: The central bank hopes the rate cut will “give the economy a shot in the arm.”

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This article was inspired by: Source: Reuters, May 29, 2025