The Bank of Korea (BOK) in Seoul on December 28, 2024.
Kim Jae-Hwan | Light flare | Getty Images
South Korea’s central bank held its benchmark rate at 3 percent 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 forecast a drop of 25 basis points.
In its statement, the BOK said that although inflation had stabilized and household debt had slowed, “downside risks to economic growth have intensified and exchange rate volatility has increased.” is heightened due to the unexpected political risks that have recently intensified.”
The bank also said uncertainty had also increased due to “changing domestic political situations and economic policies of major countries.”
The BOK’s decision comes amid political unrest in the country, with the arrest of deposed President Yoon Suk Yeol on Wednesday, a first for a sitting South Korean president.
South Korea’s Kospi rose 1.25% after the decision, while the small-cap Kosdaq index rose 1.69%. The South Korean won strengthened around 0.3% to trade at 1,450.27.
Alex Holmes, research director for Asia at the Economist Intelligence Unit, told CNBC’s “Squawk Box Asia” immediately after the decision that it was a “very delicate” decision for the bank.
“I mean, on the one hand, even before all this political uncertainty, the economy wasn’t necessarily doing very well. Yes, the pockets of the export sector were very, very active. You know, the chips, the semi “drivers, electronics, but other exports really weren’t doing very well,” Holmes said.
“And in fact, the national economy was struggling to regain its momentum. So there was a rather dovish context in terms of growth, but at the same time, you had to counterbalance the fact that the currency sold in a very marked,” he added.
The won has fallen more than the Japanese yen since early October, despite the fact that the BOK has a lower interest rate differential than the U.S. Federal Reserve, Holmes added.
At the same time, Holmes noted that 2024 was the first year that household debt had declined as a percentage of GDP, and that the BOK would not want to cut rates too quickly to prevent a rebound.
GDP ‘very likely’ to miss forecasts
In its statement, the central bank said it was “highly likely” that South Korea would fail to meet its full-year GDP growth forecast 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 confidence.”
The BOK noted that in December, while export growth “increased somewhat”, the consumption recovery weakened and construction investment “remained sluggish”.
Additionally, the central bank also said that “major uncertainties remain about the future trajectory of economic growth,” due to changes in domestic politics, economic stimulus measures, as well as the policies of the new Trump administration. .
