BOK stands pat on key rate amid falling won

South Korea's central bank held its base rate steady at 3 percent Thursday, keeping its guard up against the further weakening of the local currency.

Following two consecutive 0.25 percentage point rate cuts in November and October, the Bank of Korea's monetary policy board maintained the policy rate at 3 percent.

It was the first monetary policy meeting held amid the political turmoil sparked by President Yoon Suk Yeol's declaration of martial law on Dec. 3 last year. The monetary policy board does not hold a rate-setting meeting in December.

Thursday's decision is based on the depreciation of the Korean won. The value of the Korean won against the dollar dropped to a 15-year weakest level at 1,486.7 in late December. If the BOK further cuts the key rate, the Korea-US rate gap will widen, likely leading to a further devaluation of the local currency.

The weakened local currency brings import prices up for Korea, a country heavily dependent on energy imports, and puts greater pressure on consumer prices, contradicting the BOK's primary objective to maintain price stability and ease inflation.

Meanwhile, though the BOK’s decision to freeze the rate may suppress further devaluation of the local currency for the time being, the country's slow economy remains a challenge. Over the past months, the country’s domestic consumption has remained weak, weighing the economy down. The outlook has been further dampened as consumer sentiment plunged to its lowest since the COVID-19 pandemic in December.

With the BOK having made its rate decision, the market now awaits the US Federal Open Market Committee meeting, set to take place Jan. 28-29.