Worries about the exchange rate intensify, South Korea's central bank unexpectedly maintains interest rates at 3%.

The Bank of Korea unexpectedly kept its benchmark interest rate unchanged at 3% on Thursday, while increasing support for small and medium-sized enterprises to boost the economy. The central bank chose to remain calm amidst political turmoil and economic slowdown, while also keeping an eye on the weakening currency. Among the 22 economists surveyed by the media, only 4 predicted that the central bank would keep the benchmark interest rate unchanged. Others expected the central bank to cut rates by 25 basis points to support the South Korean economy, which has been hit by the shocking martial law decree by President Yoon Suk-yeol and the recent Jeju Air crash, the worst air disaster in South Korea. The Bank of Korea said in a statement after deciding to hold rates unchanged: "Due to recent unexpected political risk escalation, downside risks to economic growth have increased, and currency fluctuations have intensified." The central bank stated that these factors were behind its decision to maintain the interest rate. Having already cut rates in the last two meetings, the most recent rate cut was seen as a preemptive move in response to concerns about the impact of the second Trump administration in the United States on the South Korean economy. Thursday's decision indicates that most members of the Bank of Korea's board believe they have already made enough contributions to promoting economic growth and are inclined to temporarily focus on developments at home and abroad. Kim Myoung-sil, an analyst at iM Securities Co., said, "It seems that the Bank of Korea is finding it difficult to sustain further rate cuts." Following the government's announcement of the rate cut, the Korean won slightly strengthened against the US dollar, rising by 0.4% on the same day. Korean government bond yields also rose slightly after the rate cut was announced, narrowing the day's decline. The Korean stock market generally accepted the decision, with the composite index maintaining around a 1.1% increase. President Yoon Suk-yeol's sudden imposition of martial law on December 3 shocked the nation and the markets, leaving the outlook for the government and the economy uncertain. This failed move ultimately led to the first presidential impeachment since 2016 and the first arrest of a sitting president in South Korea. Yoon Suk-yeol was detained on Wednesday and questioned on charges of rebellion. With Trump returning to the presidency next week, the threat of high tariffs looms over the trade-dependent South Korean economy, while political turmoil continues to weigh on consumer confidence. The Jeju Air crash at the end of December resulted in 179 fatalities, further darkening the cloud over the South Korean economy. The latest labor market data released on Wednesday showed that the unemployment rate has risen to its highest level in over three years. However, concerns about the economy were not enough to convince the Bank of Korea to cut rates for the third consecutive time, especially as the Korean won continues to show signs of weakness. The Korean won is the worst-performing currency in Asia in 2024, with a more than 12% decline against the US dollar, and Yoon Suk-yeol's actions have caused the Korean won to fall to its lowest level in 15 years. Considering that the Federal Reserve is now expected to cut rates at a slower pace, further rate cuts by the Bank of Korea could lead to further depreciation of the Korean won. Kim of iM Securities said, "The main reason for the central bank's wait-and-see approach seems to be the exchange rate. The Fed seeking to slow down its easing could also affect the Bank of Korea." Economist Hyosung Kwon said, "This unexpected decision shows that the central bank wants to proceed cautiously due to the financial stability risks posed by the depreciation of the Korean won. However, we still believe that further easing policies will be implemented." Keeping rates unchanged leaves open the possibility of a rate cut by the Bank of Korea in February. A Bloomberg survey shows that economists expect the Bank of Korea to lower its key policy rate to 2.25% by the end of 2025 to boost the economy. It is expected that the Bank of Korea will further lower its economic growth forecast at the meeting next month. Kong Dongrak, an economist at Daishin Securities in Seoul, said, "Although the Bank of Korea acknowledges the need for economic stimulus measures, external factors such as the Federal Reserve and the risks facing the Korean won have prompted the central bank to pause rate cuts. I believe the Bank of Korea's stance on rate cuts has not changed, and today's decision to keep rates unchanged actually means the next cut." The Bank of Korea stated that it will closely monitor domestic political developments, foreign policy changes, inflation, exchange rates, and other factors to determine the timing and pace of further policy rate cuts. Currently, the Bank of Korea is accumulating ammunition for future needs while seeking support from the government. Current Acting President and Finance Minister Choi Sang-mook has pledged to increase fiscal spending in advance and announced a holiday at the end of January to stimulate consumption. The Bank of Korea is also providing more support for small businesses, increasing the assistance program from 90 trillion won to 140 trillion won ($96 billion). Maintaining the interest rate unchanged also indicates that monetary policy can withstand political pressure, allowing policymakers to spend more time accurately assessing economic conditions while keeping a distance from ongoing turbulence. Bank Governor Lee Chang-yong will hold a press conference later on Thursday to answer questions about the future direction of interest rate policy. In addition to disclosing how many board members dissented from the latest decision, the governor may outline the expectations of board members for interest rates over the next three months.