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By Cynthia Kim and Jihoon Lee
SEOUL (Reuters) - The Bank of Korea cut interest rates by 25 basis points and significantly lowered its GDP forecasts on Tuesday, steering Asia's fourth-largest economy from a restrictive monetary policy stance towards a neutral one to support growth.
The BOK's seven-member board unanimously voted to reduce its benchmark interest rate to 2.75% at its monetary policy review, an outcome expected by 35 out of 36 economists polled by Reuters.
The reduction is the third since the BOK started cutting borrowing costs from a 15-year high in October, positioning Korean rates around 150 basis points below the U.S. Federal Reserve's target range of 4.25-4.50%.
The central bank also lowered its growth forecasts for this year to 1.5% from 1.9%, below the range of 1.6% and 1.7% flagged last month, while keeping its inflation forecast steady at 1.9% for both this year and next.
"The additional cut today is to respond to growth concerns. Consumer sentiment that deteriorated since the year-end is actually leading to weakening of other (economic) indicators, and (U.S.) tariff policies are expected to hurt exports and lead to weaker growth," Governor Rhee Chang-yong said at a press conference after the rate decision.
South Korea is grappling with the economic impact of U.S. President Donald Trump's ongoing tariff war, which is likely to undermine corporate profits. Domestic political unrest, following the brief declaration of martial law by impeached President Yoon Suk Yeol in December, continues to dampen consumer sentiment.
As of 0408 GMT, the won pared back earlier gains and declined 0.03% to 1,431.0 against the dollar.
The currency has strengthened 2.8% this year but lost more than 12% against the dollar in 2024, marking the biggest drop since 2008. The won was the worst performer among emerging Asian currencies on fears over U.S. tariffs, reduced Federal Reserve rate cut bets and expectations of further rate cuts at home.
Inflation has generally cooled enough to soothe concerns over price pressures but the won's weakness has raised concerns about further volatility in the currency.
In January, South Korea's exports declined for the first time after an impressive 16-month growth streak and at the sharpest pace in a year due to U.S. tariff uncertainty and unfavourable base effects.
Governor Rhee had previously suggested a supplementary fiscal budget of 15 trillion won ($10.51 billion) to 20 trillion won to bolster growth, but these discussions have stalled in parliament.
Most analysts surveyed anticipate two more rate cuts to 2.25% by the end of the year, despite the consensus that the Federal Reserve will likely implement fewer or no cuts in the coming months.
The market consensus of expecting two or three rate cuts this year, including the one on Tuesday, is not that different from the views of the central bank, Rhee said.
Analyst Ahn Jae-kyun at Shinhan Securities described the cut as "neither a hawkish cut nor a dovish cut, but a neutral one," maintaining his prediction of another cut in the first half, with the possibility of a third one in the July-September quarter if growth risks increase.
(Reporting by Cynthia Kim and Jihoon Lee; Editing by Jacqueline Wong)
