[Editorial] Holding the line

Korea Herald

17-04-2025

BOK holds rates steady amid currency jitters;
Gov. Rhee's comments cast long shadow
As widely anticipated, the Bank of Korea held its benchmark interest rate unchanged at 2.75 percent Thursday, taking a cautious pause amid economic volatility and an atmosphere of uncertainty sparked by the Trump administration's erratic tariff maneuvers.
In its official statement, the central bank said it was maintaining the current rate to allow space for assessing shifting domestic and global conditions. Central to its calculus were Washington's capricious trade actions, Seoul's planned fiscal stimulus and heightened instability in the foreign exchange market.
The decision comes against the backdrop of sharp swings in the value of the Korean won and a host of financial pressure points: mounting household debt, wobbly housing prices and a shifting outlook for US Federal Reserve policy. The won exchange rate rose to an intraday high of 1,487.60 per dollar on April 9 — following the imposition of 'reciprocal' tariffs from the US — before easing to close at 1,456.4 the next day after US President Donald Trump announced an unexpected 90-day pause.
Thursday's freeze follows the BOK's decision to hold rates steady in January and cut them by 25 basis points in February, signaling a tentative recalibration in light of deepening uncertainty.
But what drew even more scrutiny than the policy move itself was Gov. Rhee Chang-yong's assessment of South Korea's economic outlook. With the global economy on edge and an escalating tariff conflict between the US and China, markets listened closely for any signals from Asia's fourth-largest economy.
Rhee did not mince words. At a postdecision press conference, he likened the impact of heavy US tariffs to 'suddenly entering a dark tunnel.'
'The idea is to adjust the pace (of monetary policy) and wait for the light to come on,' he said. 'The uncertainty about the future growth path is so great that it is difficult to set even a basic case scenario for the outlook.'
He added that the central bank's new growth forecast, due next month, is expected to be 'significantly lower' — hinting that the earlier projection of 1.5 percent could be revised downward more sharply than previously assumed.
Rhee's remarks came on the heels of a downgrade by Morgan Stanley, which slashed its 2024 forecast for Korea's economic growth from 1.5 percent to 1 percent, citing escalating uncertainty from US tariffs and mounting challenges for Korean exports. The firm projects a 1.4 percent recovery in 2026.
Bleak assessments have come from elsewhere as well. JP Morgan predicted growth would fall to 0.7 percent this year, while London-based Capital Economics projected 0.9 percent — forecasts that underscore just how vulnerable Korea's trade-dependent economy remains to external shocks.
On the currency front, Rhee said the won was undervalued in light of the nation's economic fundamentals. He expressed confidence that its value would recover once fears over US trade policy and domestic political instability subside.
Notably, he pointed to political factors as a source of market turbulence — referring to former President Yoon Suk Yeol's attempt to invoke martial law as a key reason behind the won's underperformance, even amid a broader decline in the US dollar.
Rhee also acknowledged Korea's exposure to global headwinds, particularly due to its deep trade integration with China and heavy reliance on exports — factors that heighten its vulnerability to sudden shifts in US policy.
Looking ahead, analysts say the BOK is unlikely to delay another rate cut in May. With first-quarter GDP growth potentially dipping into negative territory and the outlook for the year growing increasingly grim, monetary policymakers may soon have little choice but to act.
A potential rate cut in May, however, would arrive at a politically charged moment: The nation is set to elect a new president on June 3. Rhee stressed that any monetary decision will be made from a position of political neutrality. It is equally imperative that presidential contenders respect the independence of the central bank and resist the temptation to exert undue influence. Economic stewardship must be grounded in sound policy, not campaign expediency.