Bank of Korea (BOK) in Seoul, December 28, 2024.
Kim Jae Hwan | Light Rocket | Getty Images
South Korea’s central bank on Thursday left its base policy interest rate unchanged at 3% in an unexpected move, opting to assess changes in domestic and international economic conditions after announcing two consecutive interest rate cuts at its previous meeting. Ta.
Economists polled by Reuters had forecast a 25 basis point (bp) cut.
The Bank of Korea said in a statement that although inflation has stabilized and household debt has slowed, “downside risks to economic growth have intensified, and exchange rate volatility has increased due to recently escalated unexpected political risks.” said.
The central bank also said uncertainty was rising due to “changes in the domestic political situation and economic policies of major countries.”
The Bank of Korea’s move comes amid domestic political turmoil after impeached President Yun Seok-Yeol was arrested on Wednesday, making her the first sitting South Korean president to do so.
Following this decision, South Korea’s Kospi rose 1.25% and the small-cap Kosdaq index rose 1.69%. The Korean won rose about 0.3% to trade at 1,450.27 won.
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Alex Holmes, research director for Asia at the Economist Intelligence Unit, told CNBC’s “Squawk Box Asia” shortly after the decision was made that it was a “very difficult” decision for the bank.
“So, on the one hand, even before this political uncertainty, the economy wasn’t necessarily doing well. Yes, some of the export sectors were very active. You know, chips. , semiconductors and electronics, but other exports weren’t doing very well at all,” Holmes said.
“In fact, the domestic economy was struggling to gain momentum. So it was a pretty dovish situation against the backdrop of growth, but at the same time balancing that with the fact that the currency was sold off quite significantly. “There is a need,” he added.
Holmes added that the won has depreciated more than the Japanese yen since early October, even though the Bank of Korea’s interest rate differential is smaller compared to the US Federal Reserve.
At the same time, Holmes pointed out that 2024 will be the first year that household debt has decreased as a percentage of GDP, and the Bank of Korea will not want to cut rates too quickly to prevent a rebound.
GDP is ‘likely’ to be lower than expected
The central bank said in a statement that there is a “high probability” that South Korea will not achieve the Bank of Korea’s full-year GDP growth forecasts of 2.2% in 2024 and 1.9% in 2025, respectively.
“Export growth is expected to slow and the pace of recovery in domestic demand is expected to be slower than expected due to weak consumer sentiment,” the central bank added.
The Bank of Korea said in December that export growth “increased slightly,” but the recovery in consumption slowed and construction investment “remained sluggish.”
The central bank also stated that “a high degree of uncertainty remains over the future path of economic growth” due to changes in domestic politics, economic stimulus measures, and the policies of the incoming Trump administration.
