(Bloomberg) — The Bank of Korea unexpectedly held its policy unchanged Thursday, opting to stay cool in the face of political turbulence and a slowing economy, while the government attempts its own efforts to shore up consumer sentiment.
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The central bank maintained its seven-day repurchase rate at 3% in a decision that was predicted by only four of 22 economists surveyed by Bloomberg. The others expected the bank to cut the rate by a quarter-percentage point to support an economy rocked by President Yoon Suk Yeol’s shock martial law decree, and a Jeju Air crash last month that marked the worst aviation disaster in South Korean territory.
The central bank had already lowered the rate at its last two meetings, with its last cut partly characterized as a pre-emptive move to support the economy out of concern over the impact of a second Trump administration in the US.
Thursday’s decision indicates that BOK board members largely thought they had done enough to aid growth for now and preferred to monitor developments both overseas and at home for the time being.
The BOK “could prefer to keep its ‘wait-and-see’ mode” given the impact from the two back-to-back rate cuts that preceded Thursday’s policy meeting, Citi Research analysts Jin-Wook Kim and Jiuk Choi said in a note before the decision. “Actual hard economic data trends could be surprisingly resilient despite a consumer sentiment shock from domestic political uncertainties.”
The outlook for the government and the economy remains uncertain after Yoon jolted the nation and markets with his abrupt martial law decree on Dec. 3. The botched move ultimately led to the first presidential impeachment since 2016 and the first-ever arrest of a sitting president in South Korea. Yoon was detained Wednesday and is being questioned over charges of insurrection.
The political turmoil is weighing on consumer confidence just as the threat of hefty tariffs looms over South Korea’s trade-reliant economy with the return of Trump to the US presidency next week. A Jeju Air plane crash that killed 179 people in late December has added to the gloom hanging over the economy. The latest labor market figures released Wednesday showed the jobless rate rising to the highest level in more than three years.
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Still, concerns over the economy weren’t enough to convince the BOK to lower rates for a third successive time. Fears of sparking further weakness in the South Korean won may have figured in the BOK’s thinking.
The won was Asia’s worst-performing currency in 2024 as it shed more than 12% against the dollar, with Yoon’s move spurring a slide to its lowest level in more than 15 years. Given that the Federal Reserve is now expected to cut US rates at a slower pace, an additional rate cut by the BOK might have precipitated further weakness to the currency.
“The biggest reason for the hold appears to be the exchange rate. The Fed looking to ease slower than expected may have influenced the BOK, too,” said Kim Myoung-sil, an analyst at iM Securities Co. “Three rate cuts in a row seemed too much for the BOK to handle.”
The hold still leaves open the possibility of a rate cut in February by the BOK. A Bloomberg survey shows that economists expect the BOK to bring the main policy rate down to 2.25% by the end of 2025 to shore up the economy. The South Korean bank is expected to further trim its forecast for economic growth when it meets for a decision next month.
For now the BOK is saving its ammunition for later while looking to the government for support. Finance Minister Choi Sang-mok, who is serving as South Korea’s acting president, has promised to front-load fiscal spending, and announced a one-off holiday to boost consumption in late January.
A hold also signals that monetary policy can withstand pressure from political wrangling, allowing policymakers to take more time to accurately assess the state of the economy while maintaining distance from the ongoing turmoil.
Governor Rhee Chang-yong will hold a press conference later Thursday to address questions over the future trajectory of rate policy. In addition to disclosing how many board members dissented against the latest decision, the governor is likely to outline expectations among board members for rates over the next three months.
(Adds more detail and economist comments)
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