Central bank holds key rate at 3 percent to defend local currency

BOK Gov. Rhee Chang-yong speaks at a press conference held shortly after a rate-setting meeting at the central bank's headquarters in Seoul, Thursday. (Joint Press Corps)
BOK Gov. Rhee Chang-yong speaks at a press conference held shortly after a rate-setting meeting at the central bank's headquarters in Seoul, Thursday. (Joint Press Corps)

South Korea’s growth rate in the fourth quarter of last year could have plunged below 0.2 percent, following the political turmoil caused by the currently detained President Yoon Suk Yeol’s declaration of martial law, according to the chief of the central bank.

“The fourth quarter of last year took a blow from the martial law situation,” Bank of Korea Gov. Rhee Chang-yong said following a meeting Thursday where the country's key rate was held steady at 3 percent.

"The growth rate in the fourth quarter could have inched down below 0.2 percent," he said, citing the sharp decline in domestic consumption. The BOK initially projected the economy to grow by 0.4 percent in the last three months of 2024 on-quarter.

The stalled growth in the fourth quarter is likely to bring down the yearly growth rate for 2024, which the central bank in November projected to grow by 2.2 percent.

Rhee stressed it is unclear how the ongoing political uncertainties will continue to pressure the economy.

“The growth outlook for the first quarter of this year remains uncertain, depending on the government's fiscal policy, and the normalization of the Constitutional Court (process) as Yoon has been taken into custody,” Rhee said.

Over the past few months, the country’s domestic consumption has remained bleak, weighing the economy down. The outlook has been further dampened as consumer sentiment plunged in December to its lowest since the COVID-19 pandemic.

Despite the woes of the local economy, the BOK hit a pause on the rate-cut cycle. It had exercised two consecutive 0.25 percentage point rate cuts in November and October.

“The currency depreciation was the key consideration for the rate freeze,” Rhee said. “The level of devaluation is more extreme than the fundamentals of the country, pricing in uncertainties in the local politics.”

Amid the country's leadership vacuum, the won has been struggling to defend its value against the dollar. In late December, the worth of the Korean dropped to its weakest level in over 15 years at 1,486.7.

Though the won partially recovered its value earlier this month, reaching 1,444.5 per dollar on Jan. 8, it has been hovering in the mid-1,400 won range. On Thursday, the won’s value per dollar stood at 1,456.7 when the daytime trading wrapped up on the Seoul forex market.

“The won-dollar currency rate spiked from 1,400 won to 1,470 won level (following the martial law incident). Of the amount, 50 won reflects the strengthening of the US dollar and 20 won attributes to domestic politics,” Rhee explained.

The weakened won brings import prices up for Korea, a country heavily dependent on energy imports, and puts greater pressure on consumer prices, contradicting the central bank's primary objective of maintaining price stability.

According to Rhee, if the won-dollar exchange rate remains in the 1,470 won range for a significant time, consumer prices will surge by 2.05 percent this year, 0.15 percentage points higher than the BOK's initial projection of 1.9 percent.

Rhe further stressed the monetary policy board agreed to leave room for a potential rate cut in the coming three months, considering the sluggish economy.

With the BOK’s decision to maintain the rate, the benchmark Kospi closed at 2527.49, gaining 30.68 points or 1.23 percent from the previous trading day. The secondary bourse Kosdaq wrapped up at 724.24, up 12.63 points or 1.77 percent.

By Im Eun-byel (silverstar@heraldcorp.com)