(Bloomberg) -- The Bank of Korea kept its policy settings on hold for the time being as it keeps an eye on the currency, political turbulence at home and the return of Donald Trump to the White House before making its next interest rate cut.
The central bank maintained its seven-day repurchase rate at 3% and instead ramped up its support of smaller firms to help the economy. The decision was predicted by only four of 22 economists surveyed by Bloomberg.
The others expected the bank to cut the rate by a quarter-percentage point to support an economy rocked by President Yoon Suk Yeol’s shock martial law decree, and a Jeju Air crash last month that marked the worst aviation disaster in South Korean territory.
“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. The BOK said those factors were behind its decision to stand pat.
The central bank had already lowered the rate at its last two meetings, with its last cut partly characterized as a pre-emptive move to support the economy out of concern over the impact of a second Trump administration in the US.
“Three rate cuts in a row seemed too much for the BOK to handle,” said Kim Myoung-sil, an analyst at iM Securities Co.
Thursday’s decision indicates that BOK board members largely thought they had done enough to aid growth for now and preferred to monitor developments both overseas and at home for the time being.
Still, Governor Rhee Chang-yong later said that all six of his board members see a “great chance” of a rate cut in the next three months, indicating that the latest decision was a pause in an easing cycle, not the end of the road.
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 outlook for the government and the economy remains uncertain after Yoon jolted the nation and markets 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.
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 hanging over the economy. The latest labor market figures released Wednesday showed the jobless rate rising to the highest level in more than three years.
Still, 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 at iM Securities said.
Rhee said the recent political turmoil had made the local currency about 30 won weaker against the dollar.
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
For the full report, click here
Still, the hold and Rhee’s comment about the board’s stance leaves open the possibility of a rate cut in February by the BOK. 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 said it will closely monitor the political situation at home, policy changes abroad, price growth and the exchange rate among factors to determine the timing and pace of any further cuts to its policy rate.
For now 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.
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, in an indication that the central bank doesn’t want to bear more than its share of the burden of keeping growth ticking over.
A hold also signals that monetary policy can withstand pressure from political wrangling, allowing policymakers to take more time to accurately assess the state of the economy while maintaining distance from the ongoing turmoil.
Governor Rhee Chang-yong will hold a press conference later Thursday to address questions over the future trajectory of rate policy. In addition to disclosing how many board members dissented against the latest decision, the governor is likely to outline expectations among board members for rates over the next three months.
