With rate cuts derailed by won, Korea must move faster on structural reform

Structural reform to strengthen the economy, paired with market-friendly policies that encourage corporate investment and job creation, is essential.

Rhee Chang-yong listens to a reporter’s question during a press briefing on the Monetary Policy Board’s rate decision at the Bank of Korea in Jung District, Seoul, on Jan. 15. [JOINT PRESS CORPS]

The Bank of Korea’s (BOK) rate-cutting cycle has effectively been put on hold. At its monetary policy meeting on Thursday, the central bank’s Monetary Policy Board left the benchmark rate unchanged at 2.50 percent, marking a fifth consecutive freeze. More telling than the decision itself was what disappeared from the policy statement: any reference to the “possibility of a rate cut.” At a time of growing concern over low growth, the omission signaled that the easing cycle may be over for now, opening the door to a shift in policy stance.

While a slowdown in domestic demand continues and the United States is moving toward rate cuts, the BOK has pulled back from further easing. Rising housing prices in and around Seoul are part of the explanation. More decisive, however, is the weak won. Cutting rates would risk adding further downward pressure on the currency. Bank of Korea Gov. Rhee Chang-yong said after the meeting that the exchange rate was “the single most important factor” in the rate decision.

Foreign exchange markets remain fragile. Despite a coordinated push late last year by the government and currency authorities, which included drawing on foreign reserves and cooperation with the National Pension Service, the won-dollar rate has climbed back to 1,477 after briefly stabilizing in the low 1,420s. An extraordinary moment came when U.S. Treasury secretary intervened verbally this week. Scott Bessent wrote on social media on Monday that the recent depreciation of the won “does not reflect Korea’s economic fundamentals,” lending support to the currency. The won strengthened by more than 12 won in a day but soon weakened again, rising to 1,469.7 won against the dollar and underscoring how short-lived such effects can be.

Officials argue that Korea’s fundamentals remain solid. Exports topped $700 billion last year, an all-time high, and the current account surplus is expected to reach a record. That assessment is not without merit. Still, diagnosing the recent surge in the exchange rate primarily as a matter of supply and demand, such as retail investors’ overseas stock purchases, risks encouraging ad hoc interventions that merely harden market expectations and offer bargain-buying opportunities for dollar investors.

The deeper issue is that the exchange rate is reflecting growing unease about Korea’s economic structure. Outside semiconductors, competitiveness is weakening in key industries including petrochemicals, steel and secondary batteries. Investment and hiring are constrained by layers of regulation and legislation that weigh on companies. Rapidly rising public debt driven by expansionary fiscal policy is adding to concerns.

Short-term measures to stabilize foreign exchange flows are necessary. But if policymakers truly believe the exchange rate has diverged from fundamentals, the answer lies elsewhere. Structural reform to strengthen the economy, paired with market-friendly policies that encourage corporate investment and job creation, is essential. Gov. Rhee noted that dollars are plentiful but are being held back because of expectations of further currency depreciation. Only policies that restore confidence in Korea’s economic future will bring those dollars back into circulation and allow the exchange rate to settle at a level consistent with the country’s fundamentals.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.