(Bloomberg) — Bank of Korea Governor Rhee Chang-yong linked the pace of future interest rate cuts to the economy’s ability to remain resilient in the face of the political turmoil triggered by President Yoon Suk Yeol’s short-lived martial law decree.
Following Thursday’s stand-pat decision by the central bank, Rhee said that his board saw a “great chance” of another rate cut in the next three months with the pace of easing going forward likely to depend on the state of the economy, the nation’s currency and the impact of Donald Trump’s return to the White House.
The decision to hold the rate at 3% came after two cuts in October and November, and was predicted by only four of 22 economists surveyed by Bloomberg. The other 18 economists expected a quarter-point cut to support an economy overshadowed by Yoon’s suspension from power and a Jeju Air crash last month that marked the worst aviation disaster in South Korean territory.
During a press briefing, Rhee acknowledged the deterioration in consumer confidence and economic momentum, and characterized the latest decision as a tough call to shore up a currency battered by political turmoil. He estimated that the political instability had weakened the local currency by about 30 won against the dollar.
“Previously, US monetary and trade policies were the biggest factors determining how much lower the growth rate would fall, but I think it now depends more on whether the political process will function stably and whether the economy will perform in the interim,” he said.
Yoon jolted the nation and the won with his abrupt martial law decree on Dec. 3. The botched move ultimately led to the first presidential impeachment since 2016 and the first-ever arrest of a sitting president in South Korea. Yoon was detained Wednesday and is being questioned over charges of insurrection.
“Downside risks to economic growth have intensified and the volatility of exchange rates has increased due to the unexpected political risks that have recently escalated,” the central bank said in a statement after the decision.
Of the two rate cuts made last year, the BOK characterized the November one partly as a pre-emptive move to support the economy out of concern over the impact of potential tariffs under a second Trump administration in the US.
“Looking ahead, we expect the Trump administration’s proposed trade policies to be negative on exporting economies such as Korea and weigh on its cyclical and structural growth outlook,” Bum Ki Son, an economist at Barclays Bank, said. “The current leadership vacuum also adds to concerns. We maintain our view that the BOK may lower its policy rate in February, May, and October.”
While the South Korean won had strengthened as much as around 0.4% against the dollar for day after the decision, it gave up those gains after Rhee flagged the board’s openness to another near-term rate cut. Government bond yields also lost ground following the governor’s remark. The stock market largely took the decision and Rhee’s comments in its stride with the Kospi benchmark index maintaining gains of around 1.2%.
The political turmoil is weighing on consumer confidence just as the threat of hefty tariffs looms over South Korea’s trade-reliant economy with the return of Trump to the US presidency next week. A Jeju Air plane crash that killed 179 people in late December has added to the gloom. The latest labor market figures released Wednesday showed the jobless rate rising to the highest level in more than three years.
For now, the concerns over the economy weren’t enough to convince the BOK to lower rates for a third successive time especially with the won continuing to show signs of weakness.
The won was Asia’s worst-performing currency in 2024 as it shed more than 12% against the dollar, with Yoon’s move spurring a slide to its lowest level in more than 15 years. Given that the Federal Reserve is now expected to cut US rates at a slower pace, an additional rate cut by the BOK might have precipitated further weakness to the currency.
“The biggest reason for the hold appears to be the exchange rate. The Fed looking to ease slower than expected may have influenced the BOK, too,” Kim Myoung-sil, an analyst at iM Securities Co. “Three rate cuts in a row seemed too much for the BOK to handle.”
What Bloomberg Economics Says…
“The surprise decision suggests the central bank wants to move cautiously due to financial stability risks from a weaker won…Still, we are maintaining our view that further easing is on the horizon.”
— Hyosung Kwon, economist
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A Bloomberg survey shows that economists expect the BOK to bring the main policy rate down to 2.25% by the end of 2025 to shore up the economy. The South Korean bank is expected to further trim its forecast for economic growth when it meets for a decision next month.
“While the BOK acknowledges the need for economic stimulus, external elements like the Fed and risks to the won prompted the central bank to pause,” says Kong Dongrak, an economist at Daishin securities in Seoul. “I don’t think the BOK’s stance on rate cuts has changed, and today’s hold effectively a means a cut next time round.”
The BOK is saving its ammunition for later while looking to the government for support. Finance Minister Choi Sang-mok, who is serving as South Korea’s acting president, has promised to front-load fiscal spending, and announced a one-off holiday to boost consumption in late January.
On Thursday, the BOK also offered more support for smaller companies by ramping up its aid program to 14 trillion won ($9.6 billion) from 9 trillion won. Rhee called on the government to put together an extra budget offering targeted support to help the economy as early as possible, in an indication that the central bank doesn’t want to bear more than its share of the burden of keeping growth ticking over.
“We look for the central bank to cut at the February meeting along with the releases of their latest economic forecast, with a high chance of downward growth revision,” said Wee Khoon Chong, a senior market strategist at BNY. “This is unlikely to be the end of the easing cycle.”
–With assistance from Heesu Lee.
(Adds comments from Governor Rhee and economists)
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