Seoul: The Monetary Policy Board of the Bank of Korea (BOK) has decided to maintain its benchmark interest rate at 3 percent, citing increased economic and geopolitical uncertainties. The central bank announced its decision on Thursday, emphasizing the need to assess evolving domestic and international conditions before considering any rate adjustments.
According to Yonhap News Agency, the decision to keep the Base Rate unchanged reflects the ongoing stabilization of inflation and a slowdown in household debt, balanced against intensified downside risks to economic growth. The BOK highlighted increased volatility in exchange rates, linked to unexpected political developments. The central bank noted that the domestic political situation and economic policies in major countries have contributed to the uncertainties affecting the economic outlook and foreign exchange markets.
The BOK statement pointed out that the global economy is experiencing varying levels of economic activity, with uncertainties around growth and inflation driven by the economic policies of the new U.S. administration, the pace of the Federal Reserve's rate cuts, and political developments in key countries. The global financial market is witnessing increased volatility, as evidenced by a strong U.S. dollar and rising long-term Treasury yields. The specifics of the U.S. administration's policies, as well as geopolitical risks, are expected to influence future economic and financial conditions.
Domestically, while export growth increased in December, the recovery in consumption has weakened, and construction investment remains sluggish. The labor market slowdown continues, with a reduced increase in employment numbers. The BOK anticipates a slowdown in export growth and a slower recovery in domestic demand due to weakened consumer sentiment. The GDP growth forecast is expected to fall below previous estimates, with high uncertainties relating to domestic political changes and U.S. policy impacts.
Inflation has shown a stabilization trend, with consumer price inflation rising to 1.9 percent in December, driven by higher petroleum prices. Core inflation slightly decreased to 1.8 percent. Short-term inflation expectations remain at the upper 2 percent level. While inflation is expected to remain stable, there are concerns about potential upward pressure from elevated exchange rates and uncertainties related to global oil prices and economic growth.
In financial and foreign exchange markets, the Korean won has depreciated significantly against the U.S. dollar, influenced by domestic political uncertainties and the prospect of slower U.S. rate cuts. Although stock prices initially fell, they have rebounded this year. Long-term Korean Treasury bond yields have declined over concerns of an economic slowdown, and household loans continue to slow, reflecting a decline in housing transactions and prices.
The BOK emphasized its commitment to stabilizing consumer price inflation at the target level over the medium term while monitoring economic growth and financial stability. The Board will remain vigilant regarding domestic political developments, economic policy changes, and their effects on inflation, household debt, and exchange rates. The timing and pace of any future Base Rate adjustments will be carefully considered to mitigate economic growth risks.