The Bank of Korea (BOK) Governor, Rhee Chang-yong, countered growing expectations of an interest rate reduction this month. Instead, he advocated for prompt fiscal measures to bolster South Korea’s struggling economy, facing further threats from potential trade tariffs.
In a recent interview, Governor Rhee underscored the need for fiscal stimulus, stating that both monetary and fiscal policies have room for more accommodative measures. This statement comes weeks before the BOK’s upcoming policy meeting, where it will decide on interest rates. In January, the central bank maintained its key interest rate at 3%, choosing to observe the effects of previous rate cuts in late 2024. Since then, widespread anticipation for a resumption of the easing cycle has grown, fueled by concerns over weak consumer spending, sluggish economic growth, and lingering political instability.
The re-emergence of protectionist trade policies also poses a significant risk to export-dependent economies like South Korea, adding to the speculation of a rate cut. Governor Rhee acknowledged the potential negative impact of these policies on the Korean economy, highlighting the vulnerability of both South Korea and Japan to sudden shifts in trade policy.
While acknowledging the BOK’s current rate-cutting cycle, the Governor emphasized that a rate reduction at the upcoming meeting isn’t guaranteed. He stressed the importance of carefully determining the timing and magnitude of stimulus measures. Rhee expressed confidence in the government’s capacity to expedite the implementation of existing fiscal stimulus through South Korea’s digital financial infrastructure. He suggested a supplementary budget of 15 to 20 trillion won (approximately $13.8 billion USD) to compensate for the economic losses incurred due to recent political events. He pointed out that the government’s conservative fiscal stance in recent years has provided South Korea with greater fiscal resources to address the current economic challenges.
South Korea’s economic growth stagnated in the last quarter, hampered by weak consumption and declining exports, exacerbated by political uncertainties. The BOK will revise its growth forecast for the year at its meeting on February 25th.
The current political landscape, with Finance Minister Choi Sang-mok leading the government in an acting capacity, adds another layer of complexity to the economic outlook. Governor Rhee acknowledged the disruptive impact of the recent political crisis, noting its negative effect on the South Korean won. He reiterated his previous assessment that the political turmoil had weakened the currency by roughly 30 won against the US dollar, suggesting a potential recovery if uncertainties subside.
Addressing concerns about the won’s exchange rate, currently trading in the mid-1400s against the dollar, Rhee refrained from labeling the situation as a “new normal,” emphasizing the dynamic nature of currency markets. Minutes from the January BOK meeting revealed that some board members cited the won’s weakness as a reason to postpone a rate cut, fearing further downward pressure on the currency. The won remains vulnerable to global trade tensions and ongoing political uncertainty.
Rhee acknowledged that market conditions, including exchange rate fluctuations, could influence the board’s future decisions. While the BOK doesn’t target a specific exchange rate, he cautioned against exacerbating existing pressures.
Drawing on his prior experience at the International Monetary Fund, Rhee offered insights into the evolving global trade landscape. He noted that the current trade environment differs significantly from the previous administration, potentially leading to substantial changes in the international order. The escalating trade dispute between China and the US is a particular concern for policymakers in Seoul.
South Korea’s deep integration into global supply chains makes it particularly susceptible to trade disruptions. Rhee suggested potential areas of strategic cooperation with the US, such as shipbuilding and high-tech sectors, specifically highlighting advanced semiconductors used in artificial intelligence. He expressed optimism about the opportunities presented by advanced chip technology.
Finally, Governor Rhee touched upon the potential impact of stablecoins on South Korea’s capital controls, highlighting the need for effective regulation. He emphasized that the BOK’s forward guidance, while indicative of potential future actions, remains conditional on evolving economic data and market conditions. The board will continually reassess the situation and adjust its policy stance accordingly.
