South Korea’s Central Bank Holds Steady Amid Economic Uncertainty
In a surprise move, South Korea’s central bank, the Bank of Korea (BOK), has decided to maintain its benchmark policy rate at 3%. This decision comes after two consecutive rate cuts in previous meetings, and defies economists’ expectations of a 25-basis-point cut.
Assessing Domestic and External Economic Conditions
The BOK cited the need to assess changes in domestic and external economic conditions as the reason for its decision. While inflation has stabilized and household debt has slowed down, the bank is concerned about the intensifying downside risks to economic growth. Additionally, the volatility of exchange rates has increased due to recent political risks.
Political Turmoil and Economic Uncertainty
The BOK’s move comes amid political turmoil in South Korea, with the country’s impeached President Yoon Suk Yeol being arrested, a first for a sitting president. The bank is also cautious about the changing domestic political situation and economic policies in major countries, which has increased uncertainty.
Market Reaction
Despite the surprise decision, South Korea’s Kospi index rose 1.25%, while the small-cap Kosdaq index increased 1.69%. The South Korean won strengthened about 0.3% to trade at 1,450.27.
A Delicate Balancing Act
According to Alex Holmes, research director for Asia at the Economist Intelligence Unit, the BOK’s decision was a “very tricky” one. The bank needs to balance the struggling domestic economy with the need to prevent a rebound in household debt, which has finally started to decline as a percentage of GDP.
Currency Concerns
Holmes also noted that the won has fallen more than the Japanese yen since the start of October, despite the BOK’s smaller interest rate differential compared to the U.S. Federal Reserve. The bank will need to carefully consider its next move to prevent further currency volatility.
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