Bank of Korea (BOK) on December 28, 2024 in Seoul.
Kim Jae Hwan | Light Rocket | Getty Images
A key official at the Bank of Korea said the risks posed by South Korea’s political turmoil to its economy may subside within half a year, but external pressure from possible tariffs on South Korea’s U.S. exports is “disturbing.”
“We’ve had two presidential impeachments before, and the political turmoil or uncertainty in both cases subsided within three to six months,” Soohyung Lee, a member of the Bank of Korea’s monetary policy committee, told CNBC on Thursday. “Squawk Box Asia”.
Li said political turmoil may not have much impact on the country’s economy, but downside risks from external factors are more worrisome.
Potential tariffs proposed by U.S. President-elect Donald Trump “put a lot of pressure, or significant pressure,” on export-oriented countries including South Korea, Lee said.
Tariffs will not only hit South Korea’s exports, but may also reintroduce inflationary pressures into the U.S. economy, causing U.S. interest rates to remain high and the U.S. dollar to strengthen, thereby affecting the South Korean won.
Lee acknowledged that these factors could further weaken the won as the yuan could also depreciate, which could increase volatility in the country’s financial markets.
The won last traded at 1,466.48 against the dollar, close to a 15-year low hit in December 2024.
Although the Bank of Korea has policy tools such as “foreign exchange reserves and coordination with government agencies such as the Ministry of Finance,” Lee emphasized that “the valuation of the Korean won is determined by the market” and the Bank of Korea does not have a specific target level for the foreign exchange rate.
Li said government agencies would only step in “when necessary” to “reduce volatility.”
South Korea’s economy is facing internal and external pressures, causing the country’s Ministry of Economy and Finance to forecast The country’s gross domestic product is expected to grow by 1.8% in 2025 and by 2.1% in 2024.
Bank of Korea in November Forecast revised down Rising from 2.1% to 1.9% in 2025
The Ministry of Finance will expand domestic demand Expand the scope of tax exemption for expenditures in the first half of 2025 and introduce incentives for companies that raise wages, Reuters reported.
But for the Bank of Korea, “inflation rate and financial stability will be the main focus,” Lee said. “If these three goals conflict with each other, then economic growth itself is not that important.”
The Bank of Korea unexpectedly Lower base interest rates Growth in November was 25 basis points to 3%. The move follows a 25 basis point rise Decrease in Octoberthis is the first time since 2009 that the country’s central bank has cut interest rates twice in a row.
Korean November inflation rate increased to 1.5% annually. It was below the 1.7% forecast by economists in a Reuters poll but still up from the 1.3% gain last month.
“Our economic performance has been very strong over the past 20 years, so I am cautiously optimistic about the economic situation,” Li said.
— CNBC’s Lim Hui Jie contributed to this report.
