07:16 AM EST, 11/28/2024 (MT Newswires) -- Bank of Korea (BoK) cut the policy rate by 25bps to 3.00% on Thursday, which was in line with Societe Generale's forecast but didn't match the consensus forecast of no rate changes.

The policy statement clearly said that increased downward pressure on economic growth, continued stabilization in inflation and ongoing slowdown in household debt are three key preconditions for a rate cut despite the rising volatility in the foreign exchange market, wrote the bank in a note to clients.

The statement mentioned heightened uncertainty in the global economy from Donald Trump's United States presidential victory, the slowdown of economic growth from both domestic demand and exports, and the significant decline in headline and core inflation in October.

The 2025 gross domestic product growth forecast was revised down from 2.1% to 1.9% and the 2025 headline inflation forecast also went down from 2.1% to 1.9%, which largely matched SocGen's anticipation of a downward revision to 1.9% and 2.0%, respectively. The concluding paragraph of the statement omitted the word 'carefully' in the phrase 'determine the pace of further cut,' which can be interpreted that the BoK is in the middle of a rate-cut cycle that will continue into 2025.

The rate cut decision on Thursday came along with two dissenters, Yongsung Chang and Senior Deputy Govrenor Sangdai Ryoo, who voted to hold the policy rate. The number of Board members who open the possibility of a rate cut within a three-month horizon increased from one to three.

The bank suspects that there are three doves and two hawks in the Policy Board at this juncture, though it doesn't think that this 'composition' of Board members is important for the future path of BoK policy rate.

Governor Rhee said that the stabilization of the foreign exchange markets after the US presidential election helped the decision of a rate cut on Thursday. While the policy statement and governor's conference mentioned foreign exchange market volatility as a key factor in the future policy rate decision, SocGen maintains its view that financial stability concerns -- household debt and foreign exchange volatility -- will only affect the timing of the rate cuts, not determining the terminal policy rate. Foreign exchange markets are quiet on Thursday despite the surprising rate cut.

SocGen sticks to its base scenario of two more 25bps rate cuts in Q1 and Q1 2025 toward a terminal rate and also a neutral rate of 2.50%. The BoK's official GDP forecast of 1.9% for next year and 1.8% in 2026 suggests that policymakers don't expect a visible slowdown in economic growth.

The governor and the BoK economist said that the official estimate of potential GDP growth is still 2.0% and the official forecast reflects potential negative impacts from the new Trump administration. However, the bank thinks that South Korea's potential GDP growth is close to 1.8% to 1.9% and GDP growth would fall further if 'Trump risks' turn out to be a significant negative factor in the growth outlook.