(Bloomberg) -- Bank of Korea Governor Rhee Chang-yong said it is unlikely the central bank will cut interest rates as he played down the significance for the economy of the political chaos sparked by President Yoon Suk Yeol’s shock move to impose martial law.
“This political event was very short-lived and I do not see any reason why we have to change our economic outlook at this moment,” Rhee said in an interview on Bloomberg TV. “I think we can focus on the economy’s strengths and the weaknesses of the economy rather than political side effects.”
His comments came after President Yoon Suk Yeol declared martial law late Tuesday night in a shock move that was later nullified by a parliamentary majority that included members of his own party. The overnight turmoil sent the won plunging against the dollar and rattled foreign investor confidence in the government, before losses were pared Wednesday.
Subscribe to the Bloomberg Daybreak podcast on Apple, Spotify or anywhere you listen.
Six opposition parties have now joined forces to submit a motion to impeach Yoon. The ongoing political crisis adds to risks facing South Korea’s economy as Donald Trump prepares to return to the White House with plans to impose tariffs on trading partners.
“Economic dynamics in Korea can be separated from the political dynamics, given our strong market fundamentals and the mature democracy,” Rhee said.
Rhee struck an optimistic tone compared to his remarks after the BOK cut its rate unexpectedly last month to help prepare the economy against potential trade headwinds next year. The bank also slashed its 2025 growth forecast to 1.9% versus a 2.1% projection in August.
Rhee expressed confidence in the ability of “well-trained” government officials to handle the unfolding crisis that remains hard to predict and said that the authorities have “many tools” to deal with the tumult of what he expects to be a transition period for the next couple of months. He didn’t say what that transition would look like.
He’s also hailed South Koreans as “mature” for carrying on regardless of the leadership turmoil and pointed to the stock market operating normally as a sign of the economic resilience against political upheavals.
“We have to adapt to what has happened,” he said. He maintained he was more worried about geopolitical tensions, global trade uncertainties and other structural issues plaguing the South Korean economy.
Still, those risks facing South Korea could amplify if the country is unable to digest the political turmoil effectively, he said.
Nomura Holdings economists led by Jeong Woo Park said in a note that the event is likely to prompt the BOK to become more dovish, even though they don’t expect an emergency rate cut. The rate stands at 3% and will probably drop to 2.25% by the end of 2025, they said.
The BOK last week cut its benchmark interest rate for a second-straight month, seeking to insulate the economy from the impact of US policies under Trump.
After a meeting involving Finance Minister Choi Sang-mok last night, Rhee and the government pledged “unlimited liquidity” if needed to calm markets.
Asked if there was any line in the sand for Korea’s currency that would prompt action from the central bank, Rhee said that policymakers aren’t targeting a specific level. The won is in fact only slight weaker against the dollar than it was before the martial-law drama, and the authorities have managed the situation better than might be expected, he added.
“We expect markets to stabilise as underlying economic fundamentals come back into focus,” Dave Chia, a Moody’s Analytics economist, said. “In other words, changes in monetary policy, the state of the domestic economy, and dynamics in global financial markets, particularly the US, will again be front and center in influencing the exchange rate and equity valuations.”
--With assistance from Katia Dmitrieva, Whanwoong Choi and Emily Yamamoto.
(Adds chart and comments from Rhee and economists.)
©2024 Bloomberg L.P.