BOK Holds Rate at 3%, Flags Political Risks Amid Growth Concerns

Philip Lee -

Seoul, South Korea - The Bank of Korea (BOK) held its benchmark interest rate steady at 3.00% on Thursday, citing increased economic uncertainties and heightened exchange rate volatility amid escalating political risks.

The central bank's decision comes as inflation has shown signs of stabilization while downside risks to economic growth have intensified. 

Consumer price inflation rose to 1.9% in December, driven by increased petroleum product prices, while core inflation, which excludes food and energy prices, fell slightly to 1.8%. 

Short-term inflation expectations remain at the upper 2% level.

The BOK revised its growth forecasts for 2024 and 2025, projecting figures below its previous November estimates of 2.2% and 1.9%, respectively. 

The downward revision reflects weakened consumption recovery and continued sluggish construction investment.

South Korea's KRW in financial markets has depreciated significantly against the U.S. dollar, influenced by domestic political uncertainties and expectations of more gradual U.S. rate cuts. 

Long-term Korean Treasury bond yields have declined due to concerns about economic slowdown.

Household lending has maintained its downward trend, primarily due to decreased housing transactions. 

The housing market has shifted into negative territory, with prices declining.

One board member, Shin Sung Hwan, dissented from the majority decision and advocated for a 25 basis-point rate cut.

The central bank announced an additional KRW 5 trillion (US$3.43 billion) in temporary exceptional support through its Bank Intermediated Lending Support Facility, which is intended to assist self-employed individuals and small and medium-sized enterprises facing liquidity constraints.

The BOK indicated it would closely monitor domestic political developments, changes in domestic and foreign economic policies, and trends in inflation, household debt, and exchange rates before determining the timing and pace of future rate adjustments.

(US$1 = KRW1,457.57)