Seoul: Despite growing concerns over weak growth momentum, South Korea's central bank decided to maintain its benchmark interest rate at 3 percent. This decision was made during a meeting of the Bank of Korea's (BOK) monetary policy committee in Seoul, amid a depreciating local currency and uncertainties tied to the new administration of U.S. President-elect Donald Trump.
According to Yonhap News Agency, the BOK's decision follows two consecutive rate cuts in October and November, marking the first back-to-back reductions since February 2009, a period when the country was grappling with the global financial crisis. The central bank stated that the increased economic uncertainties and foreign exchange market volatility, driven by domestic political changes and global economic policies, warranted maintaining the current rate while further assessing internal and external economic conditions.
The decision underscores the BOK's emphasis on financial stability, especially as the local currency plummeted to levels not seen since the financial crisis, trading at over 1,450 won per dollar. The currency's decline was exacerbated by domestic political instability, highlighted by President Yoon Suk Yeol's imposition of martial law, and U.S. President-elect Trump's threat of high tariffs. On Thursday, the won opened at 1,455 against the U.S. dollar, up slightly by 6.2 won from the previous session.
Further complicating the situation, the Federal Reserve indicated a more cautious approach to rate adjustments for the year, reducing the anticipated rate cuts in 2025 from four to two, a move that adversely affected Asian currencies. Experts warn that a widening interest rate gap between South Korea and the U.S. could lead to further depreciation of the won and trigger foreign investment outflows from South Korea's market.
The weaker won presents additional challenges, potentially driving inflationary pressures. BOK Governor Rhee Chang-yong noted that a rate of 1,430 won to the dollar could increase consumer prices by 0.05 percentage points. Analysts were divided on the central bank's policy direction, with some advocating for monetary easing to support weak growth momentum. South Korea faces significant risks, including declining exports, subdued domestic demand, and possible shifts in U.S. policy.
The BOK projects a 1.9 percent economic growth rate for 2025, which falls below the potential growth rate of 2 percent. Earlier, the finance ministry offered a more pessimistic outlook, predicting a 1.8 percent expansion, taking into account the heightened uncertainties from political turmoil and external factors. The BOK committee indicated that this year's economic growth is likely to fall short of its 1.9 percent forecast, with significant uncertainties clouding the future economic trajectory.