Weakening won major factor in rate freeze: BOK head

Bank of Korea (BOK) Gov. Rhee Chang-yong speaks during a press conference at the bank's headquarters in Seoul, Thursday. Yonhap

The renewed weakness of the Korean currency against the U.S. dollar was a major factor in the central bank’s latest decision to freeze the key policy rate, the nation's top monetary policymaker said Thursday.

Five of the six rate-setting members of the monetary policy board thought that the rate freeze is likely to remain in place, while the remaining member said the possibility of a cut should be left open, according to the bank’s three-month forward guidance.

“Currency considerations were undeniably the main determinant in the monetary policy decision to leave the key rate at 2.5 percent,” Bank of Korea Gov. Rhee Chang-yong said during a press conference at the bank headquarters in Seoul.

The won strengthened by about 40 won to trade at around 1,430 per dollar by the end of last year, but has since slid into the mid- to high-1,400 won range this year, a development he said warrants caution.

About 75 percent of the won’s year-to-date weakness is attributable to U.S. dollar strength, yen weakness and geopolitical risks involving Venezuela, while the remaining 25 percent reflects steady demand for the U.S. currency from local retail investors, according to Rhee.

“The National Pension Service and Korean businesses are largely cooperating with the government’s currency stabilization measures, but retail investors’ overseas investment continues to a high level, similar to those seen in October and November of last year," he said.

The remarks by U.S. Treasury Secretary Scott Bessent that the won’s recent depreciation was not in line with Korea’s strong economic fundamentals, Rhee said, were a widely shared assessment by global economists.

“Many global financial entities view that the appropriate level of the Korean won is low-1,400 won, but a handful of people continue to fan unwarranted concerns about the Korean economy, driving the won's depreciation," he said.

The governor added that a currency-driven financial crisis is unlikely because Korea is a net external creditor, meaning the won’s weakness would not lead to a full-blown financial crisis like those seen in the past, when many companies were unable to repay large amounts of foreign-currency debt.

The country’s semiconductor sector, the growth driver of the country’s export-oriented economy, is expected to continue to perform well throughout next year. “The outlook for Korea’s semiconductor industry is good over at least the next year," Rhee said.

Apart from the chipmaking industry, many “old” manufacturing sectors — including petroleum and chemicals, steel and construction — continue to struggle.

Korea Customs Service data showed semiconductor exports jumped 21.9 percent last year, while exports of remaining goods fell 1 percent, affected in part by U.S. tariffs.