The Bank of Korea (BOK) in Seoul on December 28, 2024.
Kim Jae-Hwan | Lightrocket | Getty Images
South Korea’s central bank kept its benchmark interest rate at 3% on Thursday in a surprise move, opting to assess changes in domestic and external economic conditions after making two consecutive cuts at its previous meetings.
Economists polled by Reuters had estimated a cut of 25 basis points.
In its statement, the BOK stated that, although inflation has stabilized and household debt has slowed, “downside risks to economic growth have intensified, and exchange rate volatility has increased due to unexpected political risks that have recently escalated.”
The bank also said that uncertainty was also heightened by the “changing domestic political situation and economic policies in major countries”.
BOK’s move comes amid political turmoil in the country, s impeached President Yoon Suk Yeol was arrested on Wednesdaya first for a current South Korean president.
South Korea Kospi rose 1.25% after the decision, while the Kosdaq small-cap index rose 1.69%. The South Korean won gained about 0.3% to 1,450.27.
Alex Holmes, director of Asia research at the Economist Intelligence Unit, told CNBC “Squawk Box Asiaimmediately after the decision that it was a “very tricky” decision for the bank.
“I mean, on the one hand, even before all this political uncertainty, the economy wasn’t necessarily doing well. Yeah, pockets of the export sector were very, very hot. You know, chips, semiconductors, electronics, but other exports weren’t really doing very well.” , said Holmes.
“The domestic economy has really struggled to gain momentum. So that’s been some really bad backdrop for growth, but at the same time, it has to balance the fact that the currency has really fallen significantly,” he added.
Since the beginning of October, the won has fallen more than the Japanese yen, despite the fact that the BOK has a lower interest rate differential compared to the US Federal Reserve, Holmes added.
At the same time, Holmes noted that 2024 was the first year that household debt fell as a percentage of GDP, and the BoK will not want to cut rates too quickly to prevent a recovery.
GDP will ‘very likely’ not miss forecasts
In its statement, the central bank said it was “highly likely” that South Korea would miss the BOK’s full-year GDP growth forecasts of 2.2% for 2024 and 1.9% for 2025, respectively.
The central bank added that “export growth is expected to slow and domestic demand is expected to recover at a slower pace than expected due to deteriorating consumer sentiment.”
BOK noted that in December, while export growth “increased somewhat”, consumption recovery weakened, and construction investments “remained slow”.
Furthermore, the central bank also said that “large uncertainties remain about the future path of economic growth,” due to changes in domestic policy, economic stimulus measures, as well as the policies of the incoming Trump administration.