Bank of Korea (BOK) in Seoul on December 28, 2024.
Kim Jae-Hwan | White clouds | Getty Images
South Korea's central bank on Thursday kept its benchmark policy rate at 3% in a surprise move, choosing to assess changes in domestic and external economic conditions after delivering two back-to-back cuts in previous meetings they have
Economists polled by Reuters had estimated a 25-basis-point cut.
In its statement, the BOK said that although inflation had stabilized and household debt had decreased, “downside risks to economic growth have increased and exchange rate volatility has increased due to the political risks which has recently increased.”
The bank also said that uncertainty has also increased due to “the domestic political situation and changing economic policies in key countries.”
BOK's decision comes amid the country's political turmoil, with arrested President Yoon Suk Yeol being arrested on Wednesdaya first for a South Korean president.
South Korea Kospi up 1.25% after the decision, while the small-cap Kosdaq index rose 1.69%. South Korea strengthened about 0.3% to trade at 1,450.27.
Alex Holmes, research director for Asia at the Economist Intelligence Unit, told CNBC's “Asia's Squawk Box” just after the conclusion that it was a “very difficult” decision for the bank.
“I mean, on the one hand, even before this political uncertainty, the economy wasn't necessarily doing very well. Yes, the pockets of the export sector were very, very hot. You know, chips, semiconductors, electronics, but other exports weren't doing very well at all,” Holmes said.
“And the domestic economy was really struggling to get moving. So it was really kind of a backdrop for growth, but at the same time, it has to balance because the currency has been sold a lot,” he said.
The bond has fallen more than the Japanese yen since the start of October, despite the fact that the BOK has a smaller interest rate differential compared to the US Federal Reserve, Holmes said.
At the same time, Holmes noted that 2024 was the first year that household debt declined as a percentage of GDP, and the BOK will not want to cut rates too quickly to prevent a rebound.
GDP 'very likely' to miss forecasts
In its statement, the central bank said South Korea was “very likely” to miss the BOK's full-year GDP growth forecasts of 2.2% for 2024 and 1.9% for 2025, respectively.
The central bank said that “export growth is expected to slow and domestic demand to recover at a slower pace than expected due to a decline in consumer sentiment.” “
The BOK noted that in December, while export growth had “somewhat picked up”, consumption recovery had weakened, and construction investment was “still slow”.
In addition, the central bank also said that “uncertainty remains high on the path of economic growth in the future”, due to changes in domestic politics, economic stimulus measures, as well as the policies of the Trump administration that coming in.
