fbevents
로고와 STAT 라이브

PiCK

Lee Chang-yong: "Exchange rate rose by 30 won due to martial law aftermath... Interest rate pause for external balance"

Source
Korea Economic Daily
공유하기
  • The Bank of Korea announced its decision to hold rates considering the recent sharp rise in exchange rates and political uncertainty.
  • Governor Lee Chang-yong pointed out that the 30 won rise in exchange rates could burden external balance and inflation.
  • The market predominantly expects a rate cut in the next meeting.
STAT AI Notice
  • The article was summarized using an artificial intelligence-based language model.
  • Due to the nature of the technology, key content in the text may be excluded or different from the facts.

First Monetary Policy Committee of the New Year keeps base rate at 3.0% per annum

Urgent need for exchange rate stabilization threatening 1500 won

Lowering rates could spike exchange rates and increase inflation burden

Review of effects from previous two rate cuts

Observing Trump's second term before making decisions

Market expects "rate cut next month" to be dominant

The Bank of Korea's decision to hold rates steady despite the materialization of economic sluggishness is due to the sharp rise in exchange rates caused by increased political uncertainty. The significant rise in exchange rates is seen as potentially burdening inflation, external credibility, and financial markets. The need to observe how domestic and international uncertainties, such as the impeachment situation and the inauguration of the second Trump administration, unfold is also cited as a reason for holding rates.

Lee Chang-yong, Governor of the Bank of Korea, speaks on the Monetary Policy Committee's base rate decision at a press conference held at the Bank of Korea in Namdaemun-ro, Seoul, on the 16th. On this day, the Monetary Policy Committee of the Bank of Korea decided to keep the base rate at 3.0% per annum. /Joint Press CorpsLee Chang-yong, Governor of the Bank of Korea, speaks on the Monetary Policy Committee's base rate decision at a press conference held at the Bank of Korea in Namdaemun-ro, Seoul, on the 16th. On this day, the Monetary Policy Committee of the Bank of Korea decided to keep the base rate at 3.0% per annum. /Joint Press Corps

○"Exchange rate rose by 30 won due to political reasons"

Lee Chang-yong, Governor of the Bank of Korea, focused on the exchange rate issue while explaining the background of the rate hold at a press conference held immediately after the Monetary Policy Committee's monetary policy direction meeting on the 16th. Governor Lee pointed out, "The current exchange rate is much higher than what can be explained by economic fundamentals or the interest rate gap with the U.S.," and noted that "political changes are significantly impacting the exchange rate."

The won-dollar exchange rate (as of 3:30 PM) rose from 1,402.90 won on the 3rd of last month, before the declaration of martial law, to 1,472.50 won at the end of last month. Governor Lee explained, "The exchange rate rose from 1,400 won to 1,470 won before martial law, of which 50 won was due to the global strengthening of the dollar," adding, "The rest is political influence, and considering factors such as the National Pension's hedging volume and the foreign exchange authorities' market stabilization measures, we see the political influence as greater than 20 won, at 30 won."

High exchange rates also burden inflation. When exchange rates rise, import prices increase, which is reflected in consumer prices with a time lag. Governor Lee stated, "If the exchange rate level of 1,470 won continues, this year's inflation rate will rise by 0.15 percentage points from the forecast (1.9%) to 2.05%," and added, "Although we expect the inflation rate to be at the target level (2%), we must watch with caution."

Governor Lee emphasized, "In situations of high uncertainty, it is important to observe external balance more and move once things are clearer," and added, "We thought it more appropriate to confirm the effects of the previous two rate cuts, take a breather, and observe the situation before making a judgment."

On this day, the won-dollar exchange rate in the Seoul foreign exchange market ended weekly trading at 1,456.70 won, down 4.50 won from the previous day. The exchange rate fell to the 1,440 won level immediately after the rate hold announcement but gave up some of the decline as the possibility of a supplementary budget was mentioned. On this day, the 3-year Treasury bond yield ended trading at 2.626% per annum, down 0.049 percentage points from the previous trading day. Treasury bond yields showed a similar trend to the exchange rate. Governor Lee cited the decline in the dollar index and the partial resolution of political uncertainty following President Yoon Suk-yeol's arrest warrant execution the previous day as reasons for the day's exchange rate decline.

○February likely to see both growth outlook and rates lowered

Until last week, the market largely expected the Bank of Korea to make an unprecedented third consecutive rate cut to respond to the economic downturn.

Governor Lee also explained, "All Monetary Policy Committee members thought it was natural to lower rates if only looking at the economy," and added, "Although there was only one dissenting opinion for a rate cut, there were more opinions on economic sluggishness." The market expects the Bank of Korea to cut the base rate by 0.25 percentage points at the second monetary policy direction meeting of the year, scheduled for the 25th of next month. This is because the forward guidance from the Monetary Policy Committee members unanimously indicated a rate cut, and the economic outlook in February is expected to lower the growth rate forecast.

Governor Lee explained the unanimity among the Monetary Policy Committee members by stating, "Given that the domestic economy is not as good as expected, it is desirable to lower rates to respond to the economy after confirming changes in the domestic political process and external economic conditions in the short term."

Kang Jin-kyu josep@hankyung.com

publisher img

Korea Economic DailyholderBadgeholderBadge dark

hankyung@bloomingbit.ioThe Korea Economic Daily Global is a digital media where latest news on Korean companies, industries, and financial markets.