Bank of Korea Stuns Markets with Rate Hold at 3% Amid Global Uncertainty

The Bank of Korea (BOK) has caught markets off guard by keeping its policy interest rate unchanged at 3.00% during its first meeting of the year. The decision, announced on Thursday, January 16, 2025, defied expectations of a rate cut, as the central bank assessed the impact of its back-to-back rate cuts in October and November 2024 and aimed to bolster the won, which had recently dropped to a 15-year low against the U.S. dollar.



The BOK's decision comes amidst a backdrop of global economic uncertainty, with the ongoing Ukraine crisis and lockdown measures in China weighing on the global economy. In global financial markets, government bond yields in major countries have risen, and the US dollar has strengthened considerably, due to expectations about a faster pace of the US Federal Reserve's policy normalization. Stock prices have fallen sharply as risk aversion has strengthened.

Domestically, the Korean economy has continued to recover, supported by an improvement in consumption. However, downside risks are higher than before, with a decline in export growth affected by weaker economic growth in major countries. Labor market conditions have continued to improve, with the year-on-year increase in the number of persons employed remaining high. Going forward, the economy is likely to sustain its recovery supported by the improvement in private consumption, despite slower export growth owing to moderation in global economic growth. GDP growth this year is projected to be at the upper-2% level, somewhat below the February forecast of 3.0%.

Consumer price inflation has risen significantly to the upper-4% level due to the accelerating increase in the prices of petroleum products and industrial products, the ongoing sharp rise in the prices of personal services, and increases in electricity and gas fees. Core inflation (excluding changes in food and energy prices from the CPI) and the inflation expectations of the general public have increased to the lower-3% level. Looking ahead, it is forecast that consumer price inflation will remain high in the 5% range for some time, and run at the mid-4% level for the year overall, substantially above the February forecast of 3.1%. Core inflation is forecast to rise to the lower-3% level for the year overall.

The BOK's decision to keep rates unchanged has been driven by a desire to assess the impact of previous rate cuts and bolster the won, which has weakened significantly against the US dollar in recent weeks. The central bank has also been mindful of the political uncertainty that has gripped the country following impeached President Yoon Suk Yeol's attempt to impose martial law in early December 2024. The turmoil has prompted the government to cut its 2025 economic growth forecast to 1.8% from 2.2% (Reuters, Jan. 16, 2025).

The BOK's decision to hold rates steady has been met with surprise by markets, with only seven out of 34 analysts surveyed by Reuters predicting this outcome. The majority had anticipated a 25-basis-point reduction. The decision is the first since the political crisis that has engulfed the country, and comes as the government grapples with the fallout from the crash of Jeju Air flight 7C2216, which killed 179 people in the deadliest air disaster on South Korean soil (Reuters, Jan. 16, 2025).

The BOK's decision to keep rates unchanged has raised questions about the central bank's commitment to combating inflation, which has remained high despite the slowdown in economic growth. The central bank has acknowledged the need to monitor inflation trends closely, stating that "the Board sees continued rate hikes as warranted, as inflation is expected to remain high, substantially above the target level, although domestic economic activity has slowed" (Monetary Policy Decision, Jan. 16, 2025).

In conclusion, the Bank of Korea's decision to keep rates unchanged at 3.00% has caught markets off guard, as the central bank assesses the impact of previous rate cuts and aims to bolster the won amidst a backdrop of global economic uncertainty. The decision has raised questions about the central bank's commitment to combating inflation, as consumer price inflation remains high despite the slowdown in economic growth. As the BOK continues to monitor economic growth and financial stability, markets will be watching closely to see if the central bank's stance on interest rates shifts in the coming months.