Economic downturn vs high exchange rates: BOK faces tough policy decision

Financial institution of Korea Governor Rhee Chang-yong speaks throughout a press convention on the central financial institution in Seoul, November 2024. AP-Yonhap

The market stays sharply divided on whether or not the Financial institution of Korea (BOK) will prolong its rate-cutting streak at its first financial assembly of 2025, scheduled for Jan. 16.

Amid challenges such because the impeachment proceedings in opposition to President Yoon Suk Yeol and a plane crash that claimed 179 lives on Dec. 29, expectations are mounting that the BOK might take energetic measures to assist the financial system.

If the benchmark price is lowered by 25 foundation factors, as anticipated, it would stand at 2.75 p.c, marking the third consecutive decline.

Nevertheless, vital oppositions stay, citing restricted flexibility within the overseas trade market and the potential impact of Donald Trump’s upcoming inauguration as president of the USA.

„The January financial coverage board assembly is predicted to go away room for each a price freeze and a minimize as viable choices,“ KB Securities analyst Lim Jae-kyun stated.

„Any determination is prone to be made by a slim margin, given the BOK’s inner struggles over conflicting priorities, together with inflation, financial development and trade price stability.“

The first driver of expectations for a price minimize is the rising draw back threat to the financial system.

Final November, the BOK projected financial development for 2025 at 1.9 p.c. If commerce tensions between the U.S. and China escalate, it tasks the speed to drop to 1.7 p.c. This determine didn’t even issue within the home political instability brought on by Yoon’s botched efforts to declare martial law.

Trump’s victory within the U.S. presidential election has heightened considerations about Korea’s export outlook, whereas home challenges — together with political uncertainty and the Jeju Air aircraft crash at Muan Worldwide Airport — have weighed additional on non-public consumption.

„Given the heightened draw back financial dangers and the coverage void stemming from political uncertainties, the financial authorities are prone to implement a benchmark rate of interest minimize in January,“ Daishin Securities economist Kong Dong-rak stated.

„This price minimize outlook additionally displays the potential for a coordinated coverage method with aggressive fiscal spending deliberate for the primary half of the yr.“

Nevertheless, challenges stay for any additional easing. The risky trade price is a major concern, with the won-dollar price climbing by 50 received since early December. On Dec. 7, the speed even surpassed 1,480 won per greenback — a stage not seen in 15 years.

Whereas there’s a rising anticipation that the Nationwide Pension Service will take a extra energetic method in currency hedging, many consider this may solely be adequate to curb additional depreciation of the received.

Skeptics argue that the BOK might select to maintain charges unchanged this month and take into account a minimize in February as a substitute, as a price minimize might intensify the weakening of the received.

„After evaluating the dangers, it’s anticipated that the speed minimize will probably be applied on the February financial coverage committee assembly, together with measures to stabilize the trade price,“ Daol Funding & Securities analyst Heo Jeong-in stated. „Defending the trade price stays a prime precedence.“