Korea could miss economic growth forecast due to martial law fallout: BOK chief

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Korea could miss economic growth forecast due to martial law fallout: BOK chief

Audio report: written by reporters, read by AI


Bank of Korea (BOK) Gov. Rhee Chang-yong speaks during a press conference following the Monetary Policy Board meeting at the central bank's headquarters in Jung District, central Seoul, on Jan. 16. [JOINT PRESS CORPS]

Bank of Korea (BOK) Gov. Rhee Chang-yong speaks during a press conference following the Monetary Policy Board meeting at the central bank's headquarters in Jung District, central Seoul, on Jan. 16. [JOINT PRESS CORPS]

 
Korea risks missing its 2024 economic growth forecast after President Yoon Suk Yeol’s martial law declaration and the resulting chaos, Bank of Korea (BOK) Gov. Rhee Chang-yong warned the nation on Thursday.
 
Rhee suggested that GDP expanded by just 0.2 percent or less in the fourth quarter, lower than initially expected 0.4 percent, in a news conference following Thursday's Monetary Policy Board meeting at the central bank's headquarters in central Seoul, due to the worse-than-expected drop in domestic demand. He added that last year's annual growth could fall short of the previous projection of 2.1 percent.
 

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The bank continues to be pessimistic about the outlook for the current year, which previously stood at 1.9 percent.
 
“The drop in domestic demand, especially regarding consumption and construction contraction, has been more significant than we have initially expected,” Rhee said during the conference.
 
“The fourth-quarter growth might come at 0.2 percent or even lower, [worse than] the previously projected 0.4 percent.”
 
The BOK lowered its fourth quarter growth forecast from 0.5 percent to 0.4 percent on Dec. 18. 
 
Despite mounting concerns over the falling growth rate, the local currency plunging to its weakest point in more than a decade deterred the central bank from additional easing. Earlier that day, the BOK had kept its benchmark interest rate unchanged at 3 percent, citing the weak local currency, even as the chief central banker noted that the economic situation warranted a cut.
 
Five out of six Monetary Policy Board members — excluding Rhee — supported keeping the rate unchanged, while one member, Shin Sung-hwan, supported a 25-basis-point cut.
 
Bank of Korea Gov. Rhee Chang-yong at the Monetary Policy Board meeting on Jan. 16 at the central bank in Jung District, central Seoul [JOINT PRESS CORPS]

Bank of Korea Gov. Rhee Chang-yong at the Monetary Policy Board meeting on Jan. 16 at the central bank in Jung District, central Seoul [JOINT PRESS CORPS]

 
Shin, while acknowledging that the foreign exchange situation was concerning, pointed out that the won-dollar exchange rate already reflected the market’s expectation of additional rate cuts in the future and that weak domestic demand would offset inflationary pressure.
 
The rest of the board agreed with Shin's assessment, Rhee said, but decided that it would be preferable to hold the rate steady in January considering significant external uncertainty, including the upcoming inauguration of U.S. President-elect Donald Trump.
 
Regardless, the governor hinted at an additional reduction in the upcoming three-month period.
 
 
“All six board members, except myself, believed that it is necessary to open the possibility of further cuts for the next three months,” said Rhee of the regular prognosticating forecast of board members.
 
The BOK surprised the market with a rare back-to-back 25 basis cut in November, as it prioritized stimulating the waning economic momentum over the volatile foreign exchange market situation, citing the structural slowdown in Korea’s export growth.
 
However, the won-dollar exchange rate soared to its weakest point in 15 years by the end of December, following the impeachment of not only Yoon but also former acting President and Prime Minister Han Duck-soo as well as a hawkish shift in the U.S. Federal Reserve’s rate outlook.
 
The won-dollar exchange rate, which closed at 1,401.30 per dollar on Dec. 2, soared to 1,472.50 on Dec. 30.
 
The global strengthening of the dollar was responsible for about 50 won of the 70-won jump, and the martial law-driven domestic turmoil contributed to the remaining 20 won, Rhee said. Considering the currency intervention measures implemented by authorities, the marital law incident is estimated to have pushed the won-dollar rate by 30 won.
 
The weak won’s potential impact on inflation also remains a key concern for the BOK’s future rate cuts.
 
Korea’s headline inflation rose 1.9 percent in December on a yearly basis, an acceleration from the previous month’s 1.5 percent gain, driven by the global oil price increase and the weak won.
 
If the won-dollar exchange rate continues to hover around the 1,470-per-dollar range, it may accelerate inflation by an additional 0.15 percentage points, according to the governor.
 
Regarding Yoon’s arrest on Wednesday, Rhee said, “I expect yesterday’s event will serve as an opportunity for our process to get back on its normal track.”
 
Rhee also defended his previous comments advocating for acting President and Finance Minister Choi Sang-mok, saying, “I don’t think my comments before were political — it was very much an economy-related message.”
 
The governor had previously defended Choi’s decision to appoint two Constitutional Court justices, saying, “Those criticizing [Choi’s decision] must answer to the question of what would happen to the Korean economy if he had not made the decision,” on Jan. 2.

BY SHIN HA-NEE [[email protected]]
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