On Thursday, the Bank of Korea surprised the market after opting to maintain its interest rate at 3% after two consecutive cuts in its previous policy meeting. Meanwhile, the central bank aims to focus on assessing changes in internal and external economic factors after two consecutive cuts in its previous policy meeting.
Reuters’ economists poll estimated a 25-basis-points cut in the January meeting.
The bank stated that while inflation had stabilized and household debt had decelerated, downside risks to economic growth have intensified and the exchange rate has become more volatile due to recent unexpected escalation of political risk.
A change in the domestic political situation and major countries’ economic policies have heightened uncertainty.
The central bank move came amid political chaos in the country with the arrest of impeached President Yoon Suk Yeol.
South Korea’s Kospi went up 1.25% after the decision while the small-cap Kosdaq index rose 1.69%. The won strengthened around 0.3% and traded at 1,450.27.
Alex Holmes, director of Asia research at the Economist Intelligence Unit, remarked that South Korea’s central bank decision was “very tricky” because while South Korea’s exports are going strong, only those in the chips, semiconductors, and electronics sector could reap the benefits, while the rest remain sluggish.
South Korea’s domestic economy is also struggling to gain momentum. As such, any growth will have to be at a much slower and steadier pace, at the same time, the won see a considerable amount of sales.
The won has sunk much further than the Japanese yen in early October, even if the Bok rates are relatively closer to the U.S. Federal Reserve, Holmes added.
Holmes noted that 2024 is the first year that South Korea’s household debt has eased as a percentage of GDP, and the BOK is unlikely to cut the rate hastily to prevent a rebound.
In the BOK statement, South Korea is likely to miss the bank’s full-year GDP growth forecasts of 2.2% and 1.9% for 2024 and 2025, respectively.
The export growth and domestic demand recovery are estimated to slow down due to shrinking consumer sentiment.
While December saw some growth in exports, consumption recovery had declined, and construction investment remained stagnant, the bank added.
Moreover, a change in domestic politics, economic stimulus measures, and Trump’s foreign economic policy has raised concern about the future path of economic growth.
