South Korean Central Bank Holds Interest Rate Despite Won Pressure

South Korea's central bank surprised markets on Thursday by leaving its policy interest rate unchanged at 3.00%, prioritizing stability after back-to-back rate cuts last year. This decision was unexpected by most analysts, as only seven out of 34 economists in a Reuters poll had anticipated the hold, while 27 had predicted a third consecutive 25 basis-point cut, which would have marked the first triple cut since 2009.

The decision comes amidst significant political and economic turbulence. The impeachment of President Yoon Suk Yeol in early December triggered the nation’s most severe political crisis in decades. The turmoil led the government to lower its 2025 economic growth forecast from 2.2% to 1.8%, reflecting weakened investor confidence and slowing economic momentum.

Adding to the nation's challenges, the Jeju Air flight 7C2216 crash, which claimed 179 lives, has further dampened consumer sentiment. Meanwhile, the South Korean won has been under immense pressure, hitting a 15-year low against the U.S. dollar in recent weeks. In the final quarter of 2024, the currency depreciated by 10.6%, its steepest drop since the 2008 financial crisis. This slide has emerged as a significant concern for policymakers, prompting interventions such as smoothing operations in the onshore dollar-won market and currency hedging by the National Pension Service.

The Bank of Korea's decision to hold rates underscores its cautious approach to balancing economic recovery efforts with measures to stabilize the won. Following the announcement, South Korea's policy-sensitive 3-year treasury bond futures pared earlier gains, reflecting mixed market sentiment.