BOK Holds Base Rate at 2.50% on January 15
Exchange Rate Surges Again to Upper-1,400 Won Despite FX Authorities' Efforts
Persistent Real Estate Expectations and Inflationary Pressure from High Exchange Rate Considered
At the first Monetary Policy Committee (MPC) meeting of the Bank of Korea this year, the benchmark interest rate was kept unchanged at 2.50% per annum. This marks the fifth consecutive freeze, following similar decisions in July, August, October, and November last year. The decision reflects several factors: the won-dollar exchange rate has surged back to the upper 1,400 won range despite stabilization efforts by the foreign exchange authorities; expectations for further increases in housing prices remain strong; and concerns persist about inflationary pressures stemming from the high exchange rate.
Lee Changyong, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee plenary meeting held at the Bank of Korea headquarters in Jung-gu, Seoul, on the morning of the 15th.
"Despite Strong Intervention by Foreign Exchange Authorities..." Exchange Rate Again Threatens Upper 1,400 Won Level
On the 15th, the Monetary Policy Committee of the Bank of Korea decided to maintain the benchmark interest rate at 2.50% per annum during its monetary policy direction meeting held at the Bank of Korea headquarters in Jung-gu, Seoul. This decision was in line with market expectations. In a recent survey conducted by The Asia Business Daily, all 13 experts surveyed predicted a rate freeze this month. In its monetary policy statement, the MPC said, "While inflation is expected to gradually stabilize, growth continues to improve and risks to financial stability persist. We believe it is appropriate to maintain the current level of the benchmark rate while closely monitoring domestic and external policy conditions."
The main reason for this month's rate freeze is exchange rate instability. The won-dollar exchange rate, which soared above 1,480 won at the end of last year, appeared to stabilize due to government intervention but has since risen again, surpassing the 1,460 won mark in the new year. On December 24 last year, strong intervention by the foreign exchange authorities pushed the rate below 1,450 won in a single day, and it fell as low as 1,429.8 won on December 29. However, since the start of the new year, the rate surged to 1,477.5 won as of the previous week's closing price, driven by a stronger dollar, a weaker yen, heightened geopolitical risks, and continued overseas investment by residents.
On the 15th, the electronic board in the dealing room of Woori Bank headquarters in Jung-gu, Seoul, displayed the domestic stock market and exchange rates.
Overnight, U.S. Treasury Secretary Scott Bessent made an unusual verbal intervention, stating that "a decline in the value of the won and excessive volatility that are inconsistent with Korea's strong economic fundamentals are undesirable." As a result, the exchange rate fell to the 1,460 won range on the morning of the 15th, but market concerns remain. Last month, the average monthly exchange rate (based on the standard transaction rate) was 1,467.4 won, the highest in about 27 years since March 1998 (1,505.3 won) during the Asian financial crisis. Last year's annual average exchange rate was 1,422.2 won, surpassing the 1998 level (1,398.9 won) and reaching a record high.
If the benchmark interest rate were to be lowered while the exchange rate remains high, the interest rate gap between Korea and the United States would widen, potentially prompting foreign investment funds to seek higher returns elsewhere and further depreciating the won. The current U.S. policy rate stands at 3.50-3.75%, which is 1.25 percentage points higher than Korea's at the upper end. In the market, many expect the next U.S. rate cut to come after March. Given the recently released U.S. growth and inflation data, there is a strong possibility that the Federal Reserve will pause before considering further cuts. The MPC plans to maintain the current benchmark rate and continue monitoring domestic and external policy conditions, as risks to financial stability, including exchange rate volatility, persist.
High Exchange Rate Increases Inflationary Pressure... Expectations for Further Rise in Real Estate Remain
Rising import prices due to the exchange rate, combined with higher consumer prices exceeding the Bank of Korea's inflation target (2.0%), also supported the decision to keep rates unchanged. In December last year, the Consumer Price Index stood at 117.57 (2020=100), up 2.3% from a year earlier. This marked the fourth consecutive month of inflation above 2%, following 2.1% in September, 2.4% in October, and 2.4% in November. Although international oil prices are expected to fall and keep annual inflation slightly above target at 2.1% this year, caution remains high since the end of last year. The MPC stated, "Going forward, inflation is expected to gradually fall to around 2% due to stable international oil prices, but the elevated exchange rate will act as an upside risk."
Concerns also persist regarding the housing market and household debt. While the government's October 15 measures and banks' total household loan management have slowed the growth of household debt, expectations for further increases remain, raising concerns that this may only be a temporary pause due to strong regulations. Housing prices in the Seoul metropolitan area have continued to rise sharply. According to the Korea Real Estate Board, in the first week of January this year (as of the 5th), the average sale price of apartments in Seoul rose by 0.18% compared to the previous week. This marks 48 consecutive weeks of increases since the first week of February last year.
Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Committee plenary meeting held at the Bank of Korea headquarters in Jung-gu, Seoul on the morning of the 15th.
Will the Rate Freeze Continue? "One More Cut This Year" vs. "No Change Within the Year"
There is a growing view that the rate freeze could be prolonged. While many expect an additional rate cut later this year, considering the possibility of weaker growth momentum in the second half, others believe that the overall economic recovery will lead the MPC to prioritize financial stability, potentially extending the current monetary policy pause. Paek Yunmin, a researcher at Kyobo Securities, said, "Given the high base effect for growth and the possibility of weaker growth momentum in the second half, the need for an additional rate cut in the third quarter may become more pronounced." Heo Moonjong, head of Woori Finance Research Institute, also predicted, "Although growth is expected to recover this year, it will still fall slightly short of the potential trend. The Bank of Korea is likely to cut rates further in the second or third quarter, balancing financial stability with support for economic recovery."
On the other hand, there are also strong arguments for maintaining the current rate throughout the year. Yoon Yeosam, a researcher at Meritz Securities, said, "If the semiconductor supercycle slows in the second half of this year and the 2027 budget is reduced to within 5% of the medium-term balance, the need for monetary easing may reemerge as fiscal-driven growth weakens. In that case, an additional rate cut could occur in the first quarter of next year." Jeong Seongtae, a researcher at Samsung Securities, also predicted that the rate would remain unchanged within the year, citing improved growth, a rising exchange rate, and increased inflationary pressures.
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
