The Bank of Korea's Monetary Policy Committee held the base rate steady at 2.75% last month, citing the deepening foreign uncertainty due to the United States' reciprocal tariff imposition and increased volatility in the won-dollar exchange rate. However, Commissioner Shin Sung-hwan argued for the need to lower interest rates, noting the increasing economic downside risks.
According to the minutes from the Monetary Policy Committee meeting held on Apr. 17, released by the Bank of Korea on the 7th, five out of six commissioners, excluding Governor Lee Chang-yong, argued for maintaining the interest rate. With a majority advocating for a freeze, the base rate was kept at 2.75%.
◇ Monetary Policy Committee member: “The U.S. reciprocal tariffs have increased exchange rate and household debt volatility.”
The Monetary Policy Committee members pointed to the expanded uncertainty in external conditions as the background for freezing the base rate. On Mar. 9, before the committee meeting, the U.S. government announced reciprocal tariffs as high as 10-34% (for China), exceeding market expectations. The U.S. subsequently accelerated policy changes, swiftly raising tariffs on China while suspending tariffs on other trading partners, contributing to increased market volatility.
In particular, committee members noted the increased volatility in exchange rates due to these repercussions. Despite the alleviation of domestic political unrest following the impeachment of former President Yoon Suk-yeol, the won-dollar exchange rate fluctuated significantly, moving between the low and high 1400s. According to the Bank of Korea, the average exchange rate volatility and the change rate (compared to the previous day and on a weekly transaction basis) in April were recorded at 9.7 won and 0.67%, respectively, the largest fluctuations since Nov. 2022 (12.3 won and 0.9%).
One Monetary Policy Committee member evaluated, “While the need for preemptive interest rate cuts is growing due to economic sluggishness, considering the significant Korea-U.S. interest rate gap (1.75 percentage points based on the upper interest rate), the volatility in the foreign exchange market, and the uncertainty in trade negotiations, it would be prudent to keep the base rate steady at this level and monitor domestic and international economic conditions as well as the policy directions of major countries.”
Another Monetary Policy Committee member also expressed support for keeping the base rate steady, stating, “Given the high uncertainty in the growth path and the necessity to be cautious of the risks associated with sustained high exchange rate volatility from a financial stability perspective, we need to further observe whether the trend of slowing household debt growth will continue as expected.”
Concerns were also raised that hasty interest rate cuts could stimulate household debt. One Monetary Policy Committee member stated, “I confirmed that, after the land transaction permission area was lifted and re-designated, there is still expected housing price increase and latent investment demand in some regions.” They added, “Household debt is expected to expand significantly in the short term due to a large increase in housing transactions in the first quarter.”
Furthermore, this Monetary Policy Committee member noted, “Even if interest rates are lowered additionally, in a situation where uncertainty remains high and economic activity is contracted, there is a high likelihood of funds being channeled into the financial and real estate institutional sectors.” Therefore, they mentioned it would be advisable to keep the base rate steady.
◇ ‘Minority opinion for rate cut’ Shin Sung-hwan: “Significant downward adjustment of growth rate likely.”
However, Commissioner Shin Sung-hwan, the only member to express a rate cut minority opinion at the last meeting, focused more on the possibility of growth slowdown. He stated, “Consumption sentiment has worsened and domestic demand is contracting due to sluggish construction activity, and the uncertainty in foreign affairs has expanded significantly due to U.S. tariff policies, making the outlook for growth significantly more downward-adjusted. In particular, exports are expected to slow more than initially anticipated.”
He continued, “Considering the increased likelihood of significant downward adjustments to the growth rate and the rising deflationary pressure on prices due to the slowdown in growth, I believe that a substantial rate cut is necessary.” He concluded that lowering the base rate from the current level of 2.75% to 2.5% would be appropriate.
He assessed that the increase in household debt is at a manageable level. Commissioner Shin stated, “The housing prices in some areas of Seoul that surged after the lifting of the land transaction permission system are stabilizing following reassignment.” He remarked, “While household debt may see a relatively significant increase in the second quarter due to the sharp rise in housing transactions earlier this year, considering that the housing market is stabilizing, the increase in household debt is expected to be temporary.”
Meanwhile, during this Monetary Policy Committee meeting, opinions emerged that the combination with fiscal policy is important for alleviating the downside risks to the economy. One committee member remarked, “The uncertainty regarding growth outlook is exceedingly large, and this unpredictable uncertainty acts as a constraint on monetary policy, which can only address so much with monetary policy alone.” They stated that meaningful progress is required regarding the combination of fiscal and monetary policies.