BOK prioritizes won's volatility over economy in rate decision
Central bank holds key rate steady at 3%
Bank of Korea Governor Rhee Chang-yong speaks during a press conference at the bank headquarters in Seoul, Thursday. Yonhap
The Bank of Korea (BOK) held its key interest rate steady at 3 percent, Thursday, despite a stagnant economy, citing the recent sharp weakening and elevated volatility of the Korean currency as a key factor in delaying a much-anticipated monetary easing.
The BOK evaluated that the Korean economy is experiencing an extended, steeper-than-expected downturn, as reflected in the sharp decline of broader economic sentiment indices since President Yoon Suk-yeol's controversial martial law declaration on Dec. 3, 2024. However, BOK Governor Rhee Chang-yong said a pause in policy is necessary to fully assess the impact of consecutive monetary easing measures implemented in October and November.
Rhee said the detention of the president on Wednesday for questioning by investigators will help Korea avoid a feared downgrade in its creditworthiness. However, the country will remain under close scrutiny from offshore investors, who will be watching whether the economic dynamics are functioning independently of political uncertainties, a point Rhee has consistently emphasized.
Shin Sung-hwan, a well-known dovish member of the rate-setting committee, cast a dissenting vote. However, all six members indicated in their forward guidance that they are open to the possibility of easing within the next three months.
“A rate cut would be fair if we only consider the economic downturn,” Rhee said during a press conference.
“However, monetary easing has a broad-based, overarching impact on a number of economic and financial conditions. Among the most important factors this time was foreign exchange volatility.”
The Korean currency weakened sharply against the U.S. dollar over the past month, with a 30-won devaluation attributed to the martial law fiasco.
In his view, the depreciation of the won is excessive, given the country's strong economic fundamentals and the interest rate differential with the U.S. Federal Reserve.
“Of the 70-won depreciation, 50 won is attributable to the global dominance of the U.S. dollar," he said.
He added that following the impeachment of Prime Minister Han Duck-soo, the subsequent plunge of up to 60 won was attributed to the political developments.
“We believe the National Pension Service's (NPS) hedge instrument and our market stabilization measures limited a further devaluation of the won.”
The country’s economic uncertainties are expected to see a breakthrough, aided by the detention of Yoon, 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. My messages lost strength somewhat during the time when Yoon resisted detention, but I will continue my part to reassure offshore investors and global credit rating agencies of the resilience of the country’s democracy and rule of law.”
However, some experts argued that a rate cut would have been timely.
Joo Won, an economist at Hyundai Research Institute, stated that the steady rate did not take into account the weakening economy.
“The central bank is likely to face a wave of criticism for falling behind in efforts to revive the struggling economy, as reflected in weak job growth and declining domestic spending.”
Heron Lim of Moody's Analytics said the BOK's decision was in line with expectations.
"However, the darkening 2025 economic outlook — sluggish domestic demand and the second Donald Trump administration's trade policy that heightens 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."