Bank of Korea Governor Rhee Chang-yong, pats a gavel during a meeting to determine the bank's benchmark interest rate in Seoul, Jan. 16. Joint Press Corps.
Despite mounting woes leading to weak growth momentum, Korea's central bank kept its benchmark interest rate frozen Thursday in the wake of the weak local currency amid political chaos and uncertainties stemming from the new Donald Trump administration.
The monetary policy committee of the Bank of Korea (BOK) held its key rate unchanged at 3 percent during a rate-setting meeting in Seoul.
The on-hold decision came on the heels of two rate cuts in the prior meetings in October and November, which marked the first back-to-back interest rate cuts since February 2009 when the country was reeling from the aftermath of the global financial crisis.
"Political changes sparked by the (impeached President Yoon Suk Yeol's) martial law imposition have greatly affected the foreign exchange market. The won-dollar exchange rate is higher than what we can expect based on our economic fundamentals and the rate gap with the United States," BOK Gov. Rhee Chang-yong said.
"Uncertainties also remain high regarding the new U.S. government. Given such financial imbalances and uncertainties, it was appropriate to take a breather to weigh our two previous rate cuts and take a cautious step," he added.
One out of six board members supported a rate cut this month, while all the members voiced a need to keep open the possibility of further rate reductions in the next three months, according to the chief.
Thursday's decision highlights the BOK's focus on ensuring financial stability, as the local currency recently weakened sharply to well below 1,450 won per dollar, a level unseen since the financial crisis.
The won's weakening came as Yoon's shocking martial law imposition caused political turmoil, while U.S. President-elect Trump warned of high tariffs.
The local currency opened at 1,455 won against the greenback Thursday, up 6.2 won from the previous session.
The Federal Reserve also hinted at a cautious approach to rate cuts this year, scaling back the number of rate cuts it anticipated in 2025 to two from the initial four, which hammered Asian currencies.
A widening gap between the key rates of Korea and the United States would cause the won to slide further and lead to an outflow of foreign investment from the local market, according to experts.
The rate-freezing decision keeps the difference at up to 1.5 percentage points.
Analysts had been sharply divided on the central bank's policy direction amid calls for the need to prop up weak growth momentum through monetary easing.
The country is facing mounting downside risks, including slowing exports, weak domestic demand and potential U.S. policy changes.
Bank of Korea Governor Rhee Chang-yong, speaks during a meeting to determine the bank's benchmark interest rate in Seoul, Jan. 16. Joint Press Corps.
"If we only consider economic circumstances, a rate cut this time was fair, though supporting the economy only with monetary policy measures seems undesirable," Rhee told reporters.
The real gross domestic product (GDP) — a key measure of economic growth — might fall below 0.2 percent in the fourth quarter of 2024 due mainly to the impact of the martial law imposition, he noted.
The country's economic growth this year is "highly likely to fall below" its earlier forecast of 1.9 percent, the BOK governor said.
Earlier this month, the finance ministry presented a bleaker outlook of a 1.8 percent expansion in 2025, given heightened uncertainties from the political chaos and external factors.
The weaker won could also cause inflationary pressure.
"If the current 1,470 won level per dollar continues, we are expected to see prices grow by 0.15 percentage point to 2.15 percent," Rhee said. "We need to stay vigilant given the exchange rate and rising global oil prices." (Yonhap)