Bank Of Korea Unexpectedly Keeps Key Rate Unchanged

(RTTNews) - Bank of Korea unexpectedly maintained its key interest rate on Thursday despite political unrest intensifying downside risks to economic growth.

After two back-to-back cuts, the Monetary Policy Board decided to hold the base rate at 3.00 percent, while markets widely expected a quarter-point reduction.

Among seven board members, one member Shin Sung Hwan voted against the decision to leave the Base Rate unchanged, proposing to lower it by 25 basis points.

Governor Rhee Chang Yong said board members are open to rate cuts within the next three months.

"...downside risks to economic growth have intensified and the volatility of exchange rates has increased due to the unexpected political risks that have recently escalated," the bank said in a statement.

"While closely monitoring the domestic political situation, changes in economic policies both at home and abroad, and the resulting trends in inflation, household debt, and the exchange rate, the Board will determine the timing and pace of any further Base Rate cuts to mitigate downside risks to economic growth," the bank said. Regarding consumer prices, the board said inflation will remain stable supported by subdued demand pressure. Nonetheless, elevated exchange rates could potentially exert upward pressure. The board expressed concerns over the impact of currency volatility on inflation and financial stability.

The bank said it is highly likely to miss the GDP growth outlook for 2024 and 2025. In November, the bank had projected growth of 2.2 percent in 2024 and 1.9 percent this year. Capital Economics' Gareth Leather said the central bank is likely to resume its easing cycle soon amid signs the political crisis is weighing on the economy.

The economist said even if the crisis is resolved soon, economic growth is expected to struggle as a combination of weak income growth, a downturn in the property sector and tight fiscal policy weigh on demand.