Bank of Korea left rates unchanged at 3%

South Korea’s central bank unexpectedly left its key rate at 3% on Thursday, deciding to assess changes in domestic and external economic conditions after cutting rates twice in a row at its previous meetings.

Economists polled by Reuters had estimated a cut of 25 basis points.

The BOK said in a statement that while inflation had stabilized and household debt had slowed, “downside risks to economic growth have intensified and exchange rate volatility has increased due to unexpected political risks that have recently intensified.”

The bank also said that uncertainty has also increased due to “changes in the domestic political situation and economic policies in key countries.”

The BOK’s move comes amid political turmoil in the country, with the arrest of impeached President Yoon Suk-yeol on Wednesday, a first for a sitting South Korean president.

South Korea Kospi rose 1.25% after the decision, while the Kosdaq small-cap index gained 1.69%. The South Korean won strengthened about 0.3% to 1,450.27.

Alex Holmes, director of Asia research at the Economist Intelligence Unit, told CNBC “Squawk Box AsiaImmediately following the decision that it was a “very difficult” decision for the bank.

“I mean, on the one hand, even before all this political uncertainty, the economy wasn’t necessarily doing very well. Yes, pockets of the export sector were very, very hot. You know, chips, semiconductors, electronics, but other exports were doing very well not very good,” Holmes said.

“And in reality, the domestic economy was gaining momentum with difficulty. So it’s been kind of a really dovish backdrop for the rally, but at the same time it has to balance out the fact that the currency has really sold off quite significantly,” he added.

It has fallen more than the Japanese yen since early October, despite the fact that the BOK has a narrower interest rate differential compared to the US Federal Reserve, Holmes added.

At the same time, Holmes noted that 2024 was the first year that household debt fell as a percentage of GDP, and the BOK would be reluctant to cut rates too quickly to prevent a rebound.