The Bank of Korea (BOK) in Seoul on December 28, 2024.
Kim Jae Hwan | Rocket Lite | Getty Images
South Korea’s central bank on Thursday kept its benchmark interest rate at 3% in a surprise move, choosing to assess changes in domestic and external economic conditions after making two successive cuts at its previous meetings.
Economists polled by Reuters had estimated a cut of 25 basis points.
Although inflation stabilized and household debt slowed, “downside risks to economic growth intensified and exchange rate volatility increased due to unexpected political risks that have escalated recently,” the Bank of Korea said in its statement.
The bank also said that uncertainty had also increased due to “the changing internal political situation and economic policies in major countries.”
The BOK’s move comes amid political turmoil in the country, with the arrest of ousted President Yoon Suk-yeol on Wednesday, the first for a South Korean president in office.
South Korea’s Kospi rose 1.25% after the decision, while the Kosdaq small-cap index rose 1.69%. The South Korean won rose by about 0.3% to trade at 1450.27.
Alex Holmes, Asia research director at the Economist Intelligence Unit, told CNBC’s Squawk Box Asia immediately after the decision that it was an “extremely difficult” decision for the bank.
“I mean, on the one hand, even before all this political uncertainty, the economy wasn’t necessarily in good shape. Yes, pockets of the export sector were very hot. You know, chips and semiconductors and electronics, but other exports weren’t in good shape,” Holmes said. At all.
“In fact, the local economy has been struggling to gain momentum. So there has been a really pessimistic backdrop to growth, but at the same time, it has to balance the fact that the currency has been sold off quite significantly,” he added.
Holmes added that the won has fallen more than the Japanese yen since the beginning of October, even though the Bank of Korea has a smaller interest rate differential compared to the US Federal Reserve.
Meanwhile, Holmes noted that 2024 was the first year that household debt as a share of GDP fell, and the BOK would not want to cut interest rates too quickly to prevent a rebound.
GDP is “highly likely” to miss forecasts
The central bank said in its statement that South Korea is “very likely” to miss its full-year GDP growth forecast of 2.2% for 2024 and 1.9% for 2025, respectively.
The central bank added, “It is expected that export growth will slow and domestic demand will recover at a slower pace than expected due to deteriorating consumer sentiment.”
The BOK noted that in December, while export growth “increased somewhat,” the consumption recovery weakened, and construction investment remained “sluggish.”
Furthermore, the central bank also said that “significant uncertainties remain along the future path of economic growth,” due to changes in domestic policy, economic stimulus measures, as well as policies of the incoming Trump administration.