By Cynthia Kim and Jihoon Lee
SEOUL (Reuters) -South Korea’s central bank unexpectedly left its policy interest rate unchanged on Thursday, weighing the impact of its back-to-back cuts last year while supporting the won which weakened to a 15-year low versus the U.S. dollar in recent weeks.
The Bank of Korea held its benchmark interest rate at 3.00% at its monetary policy review, an outcome expected by only seven of 34 economists polled by Reuters. The remaining 27 had expected a third consecutive 25 basis-point cut, marking what would have been the first triple cut since 2009.
The decision is the first since impeached President Yoon Suk Yeol’s attempt to impose martial law in early December threw Asia’s fourth-largest economy into its biggest political crisis in decades. The turmoil prompted the government to cut its 2025 economic growth forecast to 1.8% from 2.2%.
The crash of Jeju Air flight 7C2216, which killed 179 people in the deadliest air disaster on South Korean soil, has also weighed on the economy.
The won’s slide has exacerbated matters to become a major concern among policymakers. In the final three months of 2024, the currency weakened 10.6% against the dollar, the biggest quarterly drop since the third quarter of 2008.
Local currency dealers said South Korea has been relying on smoothing operations in the onshore dollar-won market as well as the National Pension Service’s currency hedging operations to support the won.
South Korea’s policy sensitive 3-year treasury bond futures sharply trimmed earlier gains after the rate decision.
In a statement released shortly after its policy decision, the central bank said it expects economic growth to be slower than the 1.9% it projected earlier for this year due to weaker exports and deteriorating consumer sentiment.
“Elevated exchange rates could potentially exert upward pressure (on consumer prices), and uncertainties have increased related to global oil prices as well as economic growth at home and abroad,” it also said in the statement.
Economists see the central bank eying a more gradual pace of interest rate reduction in the year ahead.
“It seems the Bank of Korea was also pressured to hold rates today by news headlines of ‘three consecutive rate cuts’. Its policy stance of monetary easing remains intact, and market reaction still seems to indicate a rate cut next month,” said Daishin Securities economist Kong Dong-rak.
Median forecasts in the economist survey showed one interest rate cut of 25 basis points this quarter and cuts of the same degree in both the second and third quarters taking the rate to 2.25%.
Market focus now switches to Governor Rhee Chang-yong’s press conference at 0210 GMT, where the names of any dissenters to the policy decision could be announced. Dissenting votes typically lead to policy changes in subsequent months.
(Reporting by Cynthia Kim and Jihoon Lee; Editing by Christopher Cushing)
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