Bank of Korea Governor Rhee Chang-yong speaks during a press conference at the central bank in Seoul, November 2024. AP-Yonhap
The market remains sharply divided on whether the Bank of Korea (BOK) will extend its rate-cutting streak at its first monetary meeting of 2025, scheduled for Jan. 16.
Amid challenges such as the impeachment proceedings against President Yoon Suk Yeol and a plane crash that claimed 179 lives on Dec. 29, expectations are mounting that the BOK may take active measures to support the economy.
If the benchmark rate is lowered by 25 basis points, as anticipated, it will stand at 2.75 percent, marking the third consecutive decline.
However, significant oppositions remain, citing limited flexibility in the foreign exchange market and the potential impact of Donald Trump's upcoming inauguration as president of the United States.
"The January monetary policy board meeting is expected to leave room for both a rate freeze and a cut as viable options," KB Securities analyst Lim Jae-kyun said.
"Any decision is likely to be made by a slim margin, given the BOK's internal struggles over conflicting priorities, including inflation, economic growth and exchange rate stability."
The primary driver of expectations for a rate cut is the growing downside risk to the economy.
Last November, the BOK projected economic growth for 2025 at 1.9 percent. If trade tensions between the U.S. and China escalate, it projects the rate to drop to 1.7 percent. This figure did not even factor in the domestic political instability caused by Yoon's botched efforts to declare martial law.
Trump's victory in the U.S. presidential election has heightened concerns about Korea's export outlook, while domestic challenges — including political uncertainty and the Jeju Air plane crash at Muan International Airport — have weighed further on private consumption.
"Given the heightened downside economic risks and the policy void stemming from political uncertainties, the monetary authorities are likely to implement a benchmark interest rate cut in January," Daishin Securities economist Kong Dong-rak said.
"This rate cut outlook also reflects the potential for a coordinated policy approach with aggressive fiscal spending planned for the first half of the year."
However, challenges remain for any further easing. The volatile exchange rate is a significant concern, with the won-dollar rate climbing by 50 won since early December. On Dec. 7, the rate even surpassed 1,480 won per dollar — a level not seen in 15 years.
While there is a growing anticipation that the National Pension Service will take a more active approach in currency hedging, many believe this would only be sufficient to curb further depreciation of the won.
Skeptics argue that the BOK may choose to keep rates unchanged this month and consider a cut in February instead, as a rate cut could intensify the weakening of the won.
"After evaluating the risks, it is expected that the rate cut will be implemented at the February monetary policy committee meeting, along with measures to stabilize the exchange rate," Daol Investment & Securities analyst Heo Jeong-in said. "Defending the exchange rate remains a top priority."