Bank of Korea Governor Rhee Chang-yong speaks during a press conference at the central bank in Seoul, Thursday.
Bank of Korea (BOK) cut its key rate to 3 percent, Thursday, in an unexpected back-to-back easing reflective of the country's extended overall slump, defined by weakness both in domestic consumption and export outlook. It was a further easing from October's quarter-point cut to 3.25 percent.
Central to the decision is U.S.-championed protectionism, certain to erode the global growth of Korean manufacturers in the second Trump administration.
Equally concerning is weaker-than-expected recovery in domestic consumption, explained in large part by sustained elevated borrowing costs in the years of post-pandemic tightening. Slowing pace of growth in the new employment was also a factor.
Notwithstanding the rapid weakening of the Korean currency against the U.S. dollar — albeit muted as of late, the central bank considers speedy easing is warranted by a moderate near-term containment of the rapid buildup in household debt and subsequent rise in housing prices in Seoul. Inflation is largely tempered to below the central bank target of 2 percent.
Thursday's decision had two dissent votes cast by hawkish rate-setting committee members — Chang Yong-sung and BOK senior deputy governor Ryoo Sang-dai.
Three of the six monetary policy committee members were open to the possibility of further easing within the next three months, as indicated by the forward guidance on the three-month horizon.
“A lot has changed over the past month,” BOK Governor Rhee Chang-yong said during a press conference at the central bank in Seoul.
Chief among them is U.S. President-elect Donald Trump's election victory, followed by a "red sweep," in which the Republican Party gains control of both the presidency and Congress.
“It was well beyond our expectations, sending shockwaves with wide trade implications across the globe,” he said.
Equally concerning was the weaker-than-expected growth in exports during the third quarter, driven by the overall loss of global competitiveness among Korean exporters due to structural factors.
“The two developments are new with far-reaching implications. This led us to revise the goods export growth forecast to 1.5 percent, down from the previous 2.9 percent increase made in August, grounds for additional easing.”
The removed mention of a "cautious approach" toward rate cuts is, in his view, a clear signal of the end of years of post-pandemic tightening.
“The issue now is the timing and the pace,” he said.
The risk of a recession is linked to the two factors in easing, partly determined by whether the key rate falls to the neutral level or lower.
“The monetary policy will shift toward an easing cycle from now on, an end to the past few years of rapid hikes in the key rate put in place to temper inflation. We are not yet at a stage where discussions of a below-neutral rate path should be put on the table. Recent unfavorable developments led us to accelerate the pace of easing,” the governor said.
Rhee countered renewed claims of the central bank "falling behind the curve," a source of ongoing frustration for the Bank of Korea since August.
“We took a pause in August, a decision I am proud of for its timely and significant impact on curbing the then-soaring housing prices and debt buildup. Household debt is expected to remain at around 5 trillion won ($3.5 billion) in November, supported by macroprudential measures and it is likely to decrease further next month.”
The foreign exchange landscape has shifted, a positive for reducing the country's currency volatility, he said.
"Korea is no longer a foreign currency debtor, as evidneced by domestic investors' offshore assets now exceedng the foreign holdings in Korean assets. The currency volatility concern is now more about the pace, rather than a specific level."
Rhee made it clear that he would not run for public office.
“I prepared a note,” he said in response to a question about a potential stint as a prime minister, a topic recently surfaced by local media outlets.
“The challenging economic conditions necessitate me to prioritize my duties as the head of the central bank at the moment.”
Kwon Goo-hoon, senior Asia economist and managing director at Goldman Sachs, said the monetary policy outlook turned more dovish, as indicated by dovish changes in the forward guidance and more focus on downside growth risks.
“We expected a dovish hold with a risk of a surprise cut,” he said.
“Overall, the November meeting is consistent with our view that the BOK will likely continue to ease to a terminal rate of 2.25 percent, below consensus and current market pricing. We continue to expect gradual easing of 25 basis points each quarter, totaling 75 basis point cuts by summer.”
The most important constraint to further easing has changed from financial stability concerns to exchange rates, as suggested by the rate-setting policy committee statement, Kwon said.
“Currency volatility can be addressed through BOK policy tools, as mediated by the state-owned National Pension Services in hedging its large and growing exchange rate risks.”
This was in reference to June raising of foreign exchange swap limit to $50 billion, from the previous 35 billion, prompted by the plunging of Korean currency to 1,400 won against the dollar at the time.