The Bank of Korea surprised many by keeping its key interest rate steady on Thursday, despite political unrest that poses increased threats to economic growth. The Monetary Policy Board opted to maintain the base rate at 3.00 percent following two consecutive reductions, countering widespread market predictions of a further quarter-point cut.
Among the seven board members, Shin Sung Hwan stood alone in favor of decreasing the Base Rate by 25 basis points. Governor Rhee Chang Yong indicated that the board remains receptive to possible rate cuts within the upcoming three months.
"The bank acknowledges that downside risks to economic growth have heightened and exchange rate volatility has increased due to the unforeseen political tensions that have recently arisen," it stated.
The Board, committed to mitigating these downside risks, will carefully assess the domestic political climate, shifts in economic policies both locally and internationally, and their effects on inflation, household debt, and exchange rates before deciding on the timing and magnitude of any forthcoming Base Rate reductions.
Regarding consumer prices, the board foresees stable inflation backed by suppressed demand pressures, although rising exchange rates could potentially push inflation upwards. Concerns were raised over the potential impact of currency volatility on both inflation and financial stability.
The bank conceded its GDP growth targets for 2024 and 2025 are unlikely to be met. It had previously forecasted a growth rate of 2.2 percent for 2024 and 1.9 percent for this year. Gareth Leather of Capital Economics suggested that the central bank is likely to recommence its easing cycle shortly, as the ongoing political crisis continues to burden the economy.
Leather noted that even with a swift resolution to the crisis, economic growth would likely face challenges due to a combination of sluggish income growth, a downturn in the real estate market, and stringent fiscal policies suppressing demand.
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