At a post-policy meeting press conference on Thursday, Bank of Korea (BoK) Governor Rhee Chang-yong revealed that the decision to hold the policy rate steady at 3% was not unanimous, with board member Shin Sung-hwan dissenting. The decision, made in the context of rising downside risks to economic growth, highlights the central bank’s ongoing deliberation over further rate cuts.
Governor Rhee acknowledged that all board members agreed on the necessity of a rate cut, but the fluctuating Dollar-Won exchange rate due to political turmoil played a significant role in the decision. “Dollar-Won FX rates are considerably higher than South Korea’s economic fundamentals,” he noted, underscoring concerns over political instability impacting the currency.
While the BoK is open to further cuts, with six board members signaling potential action within the next three months, the governor emphasized the need to carefully monitor the economic impact of previous rate reductions and the current political situation. Inflation-targeting remains central to the bank’s decision-making process.
Rhee further indicated that the bank would reassess the situation and issue an interim evaluation on the impact of the martial law declaration next week. He also suggested that it might be prudent to wait until domestic political turmoil stabilizes and more certainty emerges from the new US administration before making further policy adjustments.
The BoK’s decision to hold rates steady is the first since the controversial impeachment of President Yoon Suk Yeol and his attempted martial law declaration in early December. On Wednesday, South Korean authorities arrested Yoon amid escalating political unrest.
In response to the BoK’s surprise decision, the USD/KRW initially fell sharply to test 1,450 but rebounded quickly following Governor Rhee’s dovish comments, trading neutrally at 1,4554 at the time of writing.
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