South Korea’s Central Bank Holds Interest Rate Steady

By Cynthia Kim and Jihoon Lee

SEOUL (Reuters) – South Korea’s central bank unexpectedly kept its policy interest rate unchanged on Thursday, considering the effects of previous cuts while stabilizing the won, which recently hit a 15-year low against the U.S. dollar.

The Bank of Korea maintained its benchmark interest rate at 3.00% during its monetary policy review, a decision anticipated by only 7 of 34 economists polled by Reuters. The other 27 economists had forecasted a third consecutive 25 basis-point cut, which would have marked the first triple cut since 2009.

This decision comes after the impeachment of President Yoon Suk Yeol, which has plunged Asia’s fourth-largest economy into its most significant political crisis in decades. The turmoil has driven the government to lower its 2025 economic growth forecast to 1.8% from 2.2%.

Additionally, the crash of Jeju Air flight 7C2216, the deadliest air disaster in South Korean history that resulted in 179 fatalities, has further stressed the economy.

The won’s depreciation has become a significant concern for policymakers, with the currency falling 10.6% against the dollar in the last quarter of 2024, marking the steepest quarterly decline since the third quarter of 2008.

Local currency dealers noted that South Korea has relied on smoothing operations in the dollar-won market and the National Pension Service’s currency hedging operations to bolster the won.

Following the rate decision, South Korea’s policy-sensitive 3-year treasury bond futures sharply reversed earlier gains. In a statement after the policy decision, the central bank projected slower economic growth this year, below the previous estimate of 1.9%, due to weaker exports and declining consumer sentiment.

The statement warned that elevated exchange rates could potentially increase upward pressure on consumer prices, while uncertainties related to global oil prices and domestic and international economic growth have risen.

Economists anticipate the central bank will adopt a more gradual approach to interest rate reductions in the upcoming year.

Daishin Securities economist Kong Dong-rak remarked that the Bank of Korea felt pressured to avoid a rate cut to counter headlines of “three consecutive rate cuts.” He noted that its policy of monetary easing remains intact, and market indicators still suggest a possible rate cut next month.

Median forecasts from the economist survey indicate an expected 25 basis point cut this quarter, with further cuts of the same magnitude in both the second and third quarters, lowering the rate to 2.25%.

Market attention now shifts to Governor Rhee Chang-yong’s press conference at 0210 GMT, where dissenting votes to the policy decision may be revealed. Dissenters traditionally lead to subsequent policy changes.