Bank of Korea Gov. Rhee Chang-yong strikes the gavel during a Monetary Policy Board meeting at the Bank of Korea headquarters in Seoul, Feb. 25. Joint Press Corps

Korea's central bank slashed its benchmark interest rate by a quarter percentage point on Tuesday to shore up economic growth affected by domestic political turmoil and the Donald Trump administration's sweeping tariffs.

The monetary policy committee of the Bank of Korea (BOK) cut its key rate by 25 basis points to 2.75 percent during a rate-setting meeting in Seoul.

The move came a month after its rate freeze decision, which was aimed at supporting the weak local currency while assessing the impact of two rate cuts in the October and November meetings.

Tuesday's decision underlined the central bank's policy focus on economic growth as the BOK lowered its 2025 growth outlook for Asia's fourth-largest economy to 1.5 percent from its previous forecast of 1.9 percent.

"Although concerns about foreign exchange markets still remain, inflation stabilization has continued along with an ongoing slowdown in household debt, while the growth rate is forecast to decline significantly. The board, therefore, judged that it is appropriate to further cut the base rate and mitigate downward pressure on the economy," the BOK said in a released statement.

The BOK pointed to the Donald Trump administration's tariff policies, slowing exports and a slump in consumption following President Yoon Suk Yeol's shocking martial law declaration as key factors that affected growth momentum.

The rate reduction decision was unanimous, while two out of six board members voiced a need to keep open the possibility of further rate reductions in the next three months, BOK Gov. Rhee Chang-yong told a press conference.

"Coordination between monetary and fiscal policies is needed to ensure 1.5 percent growth this year. Boosting the economy only with monetary tools would affect the foreign exchange market, inflation and household debts," he added.

The governor called for a supplementary budget worth less than 20 trillion won (US$14 billion) given the growth momentum lost due to the political crisis sparked by President Yoon Suk Yeol's shocking, albeit short-lived, martial law imposition.

Such a supplementary budget would boost the growth rate by 0.2 percentage point, though any further budgeting would hurt financial soundness and cause other side effects, he added.

Yoon's martial law imposition on Dec. 3 dented private spending and investment, while leading to a leadership vacuum after the National Assembly voted to impeach him pending a Constitutional Court ruling.

Yoon is currently undergoing investigation on charges of insurrection following his formal arrest last month.

The Trump administration has pledged to impose 25 percent tariffs on all imports of steel and aluminum.

Trump also signed a presidential memorandum earlier this month to devise a comprehensive plan to customize "reciprocal" tariffs, which are feared to affect Korean industries and the broader economy given its export-driven economy.

Containers are loaded onto a ship at a port in Busan, Feb. 10. Yonhap

Exports fell 10.3 percent from a year earlier to $49.1 billion in January, logging the first on-year fall in 16 months. The country also logged the first trade deficit in 20 months by reporting a $1.89 billion deficit.

Retail sales, a key indicator of private spending, fell by the most in 21 years in 2024, marking the third consecutive year of decline.

In 2024, Korea's real gross domestic product (GDP) increased 2 percent, lower than the BOK's forecast of a 2.2 percent expansion.

In the fourth quarter alone, the economy barely grew 0.1 percent on-quarter, far lower than the BOK's forecast of 0.4 percent growth.

"While closely monitoring changes in domestic and external economic policies and in the domestic political situation, as well as the effects of the base rate cuts so far on inflation, economic growth and financial stability, the board will determine the timing and pace of any further base rate cuts," the BOK said.

The Korean won weakened markedly and has stayed well below the 1,400 won level per dollar.

The local currency opened at 1,431.0 won against the greenback Tuesday, up 3.6 won from the previous session, and was quoted at 1,430.6 won as of 12:10 p.m. (Yonhap)