Bank of Korea Governor Rhee Chang-yong speaks during a press conference at the bank headquarters in Seoul, Thursday. Yonhap
Political uncertainty-oriented weakening of 30 won excessive; Nov. back-to-back cut pass-through effect to be monitored
The much-anticipated monetary easing was delayed, hamstrung by the recent sharp weakening and elevated volatility of the Korean currency despite the stagnant economy, the country's top monetary policymaker said Thursday. The Bank of Korea (BOK) left its key rate at 3 percent.
The Korean economy is experiencing an extended, steeper-than-expected downturn, as illustrated by broader economic sentiment indices freefalling since the botched martial law declaration of President Yoon Suk Yeol, Dec. 3, 2024. However, a pause is warranted to gauge the full pass-through effect of back-to-back easing in November, according to BOK Governor Rhee Chang-yong.
The much-feared downgrade in the creditworthiness of Korea can be avoided, buoyed by Wednesday's detention of President Yoon Suk Yeol, he added. However, the county will be under scrutiny from offshore investors over whether Rhee's continued, centralized emphasis that the economic dynamics are fully functioning independent of political uncertainties.
The widely known dovish member of the rate-setting committee Shin Sung-hwan had a dissent vote. All of the six members said they were open to easing in the next three months.
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“A rate cut would be more than warranted if economic downturn were the sole consideration,” Rhee said during a press conference.
“However, monetary easing has a broad-based, overarching impact on a number of economic and financial conditions. Chief among them this time was foreign exchange volatility.”
The Korean currency plunged against the U.S. dollar to a greater extent over the past month, with the weakening of 30 won explained by the martial law fiasco.
The won depreciation is, in his view, too excessive in the context of the country's robust economic fundamentals and the interest rate differential with the U.S. Federal Reserve (Fed).
“Of the 70 won in won weakening, 50 won is attributable to the global reign of U.S. dollar," he said.
He added that after the impeachment of former Prime Minister Han Duck-soo, plunge of up to 60 won was ascribed to the political developments.
“The National Pension Service (NPS) hedge instrument and our market stabilization measures, we believe, limited further fall in value of the won.”
The country's economic uncertainties are expected to see a breakthrough, aided by the detention of Yoon and the advancing expectations of a restoration of political stability, he added.
“I have been receiving countless phone calls and emails from global institutions. My message is clear and consistent. The economy will fully function irrespective of the political wrangling. It lost strength somewhat during the time when Yoon resisted detention, but I will continue to reassure offshore investors and global credit agencies of the resilience of the country's democracy and rule of law.”
Rhee countered criticism that his politically charged New Year address was out of bounds with the expected role of the monetary policymaker.
“I think the message was as economic as it can be. I was deeply concerned about a potential impeachment of acting President Choi Sang-mok at the time, and the ramification chain effect on the economy.”
Joo Won of Hyundai Research Institute said the steady rate lacked consideration for the slumping economy.
“The central bank will find itself in a barrage of criticism for falling behind the curve to reinvigorate the anemic economy, as evidenced by weak job growth and flagging domestic spending.”
Heron Lim of Moody's Analytics said Wednesday's decision was in line with expectations.
"The BOK held its policy rate at 3 percent in Thursday's meeting, as we had expected," he said.
"However, the darkening 2025 economic outlook — sluggish domestic demand and the second Trump administration's trade policy heightening external demand uncertainties made the BOK's decision more difficult. The central bank will not find its job any easier in the near term as these uncertainties are unlikely to lift quickly."