Bank of Korea Rate Cut Not a Done Deal This Month, Rhee Warns

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(Bloomberg) — Bank of Korea Governor Rhee Chang-yong pushed back against mounting speculation of an interest-rate cut later this month as he called for swift fiscal stimulus to shore up a sputtering economy further threatened by Donald Trump’s tariffs.

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“That is why I’m emphasizing more fiscal stimulus is necessary,” Rhee said in an interview Thursday with Bloomberg TV’s Shery Ahn in Tokyo. “Definitely we think monetary policy and fiscal policy both have room for more accommodative policies.”

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The governor’s comments come less than three weeks before the BOK’s board next meets to set policy. In January, the central bank held its key interest rate unchanged at 3%, opting to assess the impact of back-to-back cuts in late 2024. Since the hold, the BOK has been widely expected to resume its easing cycle this month as concerns deepen over stagnant private spending, slowing economic growth and the political instability triggered by President Yoon Suk Yeol’s brief imposition of martial law in December.

Trump’s return to the White House and his tariff campaign also loom large. The potential impact for trade-reliant nations such as South Korea is a clear concern for policymakers and a further source of speculation for a rate move this month.

“The US tariff policy will definitely have a negative impact on the Korean economy,” Rhee said. “Japan and Korea are a little bit off the radar at this moment, but that can change any moment.”

While the BOK is in a rate-cutting cycle at the moment, the governor said it isn’t inevitable the BOK will move at the coming meeting. Getting the timing and size of stimulus right was a key issue for policymakers, he said. 

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The governor expressed his faith in the ability of government officials to bring forward the implementation of existing fiscal stimulus via South Korea’s electronic financial networks. Then an extra budget of 15 trillion to 20 trillion won ($13.8 billion) would be an appropriate amount to match the economic growth lost due to the martial law declaration, he said. 

“Our ministry of finance maintained a very conservative fiscal policy” over the last couple of years and that means South Korea has “more fiscal resources” as the economy struggles to achieve its potential growth rate.

The economy barely expanded last quarter from the previous three months as anemic consumption and slackening exports weighed on activity with the political turmoil adding to downward pressure. The BOK will update its projection for growth this year when it meets on Feb. 25. 

The government is now led by Finance Minster Choi Sang-mok, who took over as acting president after the opposition-controlled parliament impeached Yoon and Prime Minister Han Duck-soo successively.

“In December, I was very uncomfortable,” Rhee said, citing the political crisis as a unique factor that hurt the won, while other currencies were pummeled more by Trump’s policies. Rhee reiterated his remark from the January meeting that the political turmoil weakened the nation’s currency by around 30 won against the US dollar. That margin could be retraced if uncertainties are reduced, he said.

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“I wouldn’t say this is a new normal because if I say that it means I have a certain level in mind,” Rhee said when asked about the current exchange rate in the mid 1,400s against the dollar.

Minutes from the January meeting showed some board members cited the weakness of the local currency among reasons to hold off from a rate cut that might have added to downward pressure at the time. After being the worst-performing currency in Asia last year, the won remains susceptible to further weakness triggered by rising global protectionism and political uncertainty surrounding the government in Seoul. 

Rhee said market conditions are among the elements that may affect the board’s decision going forward.

“It depends on the environment. If the exchange rate is depreciating quite rapidly, you don’t want to put oil on the fire,” he said. “Down the road, we’ll definitely look at the exchange rate, but we’re not targeting a specific level.”

Before taking the helm of the BOK in 2022, Rhee served as Asia-Pacific director of the International Monetary Fund, where he monitored the impact of Trump’s first administration.

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“About Trump 2.0 policies, I thought that my experience would help very much, but now I believe that the second term of the Trump administration is quite different from the first,” he said. “This may change a lot in the international order.”

The trade rivalry between China and the US in particular worries policymakers in Seoul. After the Trump administration slapped 10% tariffs on China earlier this week, Beijing immediately hit back with levies on US products including coal, gas and agricultural equipment. Tariffs on Canada and Mexico, now on hold, can also harm South Korea indirectly through firms with operations there.

South Korea is among nations most vulnerable to trade tensions because its manufacturers play a vital role in a wide swathe of global supply chains. Its economic growth softened during Trump’s first term when he imposed tariffs on South Koreans products, including washing machines produced by LG Electronics Co.

Rhee said shipbuilding and technology sectors could be areas of strategic coordination with the US under Trump, pointing to high-end semiconductors used for artificial intelligence as he characterized South Korea as “better positioned” than other nations.

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Samsung Electronics Co. and SK Hynix Inc. are the world’s two biggest memory-chip producers. Their shares took a hit after Chinese start-up DeepSeek revealed an artificial intelligence model that might require less powerful computers and put more downward pressure on memory-chip prices.

“If you focus on legacy semiconductors, which are low-end products, I think we have already lost price competitiveness to China, from a couple of years ago,” Rhee said. On the other hand, Rhee said he is optimistic about opportunities that more advanced chips can offer.

Rhee also touched on the topic of stablecoins, digital assets that hold a steady value unlike Bitcoin and other so-called tokens. He said they have the potential to make South Korea’s capital controls less effective as South Koreans increase their use abroad. “How we’re going to regulate the global stablecoin is now a very urgent issue and the government is looking at it.”

Those decisions need to take the latest developments into account, just like the upcoming rate call. While all the other members of the board were open to more easing in the next three months back in January, that was simply their view at the time, Rhee said.

“This is called forward guidance, but that is also conditional,” he said, stressing that the three-month outlook does not amount to a commitment. 

“They will definitely look at new evidence, and based on the new evidence, they can change their mind,” he said, referring to the board. “That is the nature of monetary policy.”

—With assistance from Shinhye Kang and Jaehyun Eom.

(Updates with more comments from governor)

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