BOK not confident on rate cut with forex fluctuation after election volatility

Bank of Korea Gov. Rhee Chang-yong said the central bank must still monitor the won-dollar exchange rate before the year's final rate-setting meeting at the end of the year.

U.S. Federal Reserve Chair Jerome Powell speaks during a press conference following a two-day meeting of the Federal Open Market Committee in Washington on Thursday [REUTERS/YONHAP]

Following the U.S. Federal Reserve’s widely-anticipated 0.25-percentage-point cut in its key interest rates and the moderation of a brief surge in election-driven volatility, Korea is now heading toward its final rate-setting meeting for this year.

Although short-term volatility has eased considerably compared to the weeks leading up to the election, persisting uncertainties in the foreign exchange market remain a significant obstacle for the Bank of Korea (BOK) in lowering its base rate despite slowing inflation.

“It is still too early to tell; we will need to monitor the [foreign exchange] market situation,” said BOK Gov. Rhee Chang-yong on Friday, addressing a question from the press on whether the central bank would be able to lower its key rate if the won-dollar exchange rate stabilizes by the next rate-setting meeting scheduled for Nov. 28.

“We should monitor the situation until at least next week,” said the governor.

From left: Financial Supervisory Service Gov. Lee Bok-hyun. Bank of Korea Gov. Rhee Chang-yong, Finance Minister Choi Sang-mok and Financial Services Commission Chairman Kim Byoung-hwan during a senior official meeting on macroeconomic issues held at the Export-Import Bank of Korea in western Seoul on Friday [JOINT PRESS CORPS]

The comment by the central bank chief came after a senior official meeting on macroeconomic issues held in western Seoul following an overnight announcement by the U.S. Federal Open Market Committee that it is lowering its key interest rates by 25 basis points from 4.75 to 5 percent to 4.5 to 4.75 percent.

Rhee suggested last month that the foreign exchange rate “will be taken into account” during the upcoming rate-setting meeting, noting that “the won-dollar rate is much higher than we initially wished for, and the scope of the increase was also very steep.”

The lower-than-expected GDP growth in the third quarter and slowing inflation are sufficient grounds for a rate reduction, as Korea saw its headline inflation slow to 1.3 percent in October, the lowest level since January 2021.

However, foreign exchange volatility remains a major risk for the Korean economy, as the strong dollar may stimulate inflation in a rate-reduction cycle.

The resounding victory of Donald Trump and the Republican Party in the U.S. elections drove the dollar’s value significantly over the past couple of days, pushing the won-dollar exchange rate to over the 1,400 won threshold before it moderated back to the 1,380 won range Friday.

“Despite a slowdown in both economic growth and inflation, as well as decreasing household loan growth, the BOK is expected to hold its key rate at the current 3.25 percent on Nov. 28, considering the need to monitor the impact of its previous rate cut in October and the recent surge in foreign exchange volatility,” wrote Woori Financial Research Institute in its note published on Nov. 4.

Ha Keon-hyeong, an economist at Shinhan Investment & Securities, expected that “the BOK is highly likely to hold its rate steady in November, while also leaving a door open to a rate cut in the next three months,” as Trump’s tariffs plan may further undermine growth for Korea’s export-driven economy.

The government has insisted that the domestic market is holding relatively stable, yet pledged to closely monitor the situation for now.

The plan is to hold a weekly senior official meeting involving relevant government branches, including the Ministry of Foreign Affairs, the Ministry of Economy and Finance and the Ministry of Trade, Industry and Energy, to share information and address the geopolitical and economic uncertainties ahead of the president-elect’s inauguration scheduled for next January.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]