SEOUL, January 15 (AJP) — The Bank of Korea’s decision to hold its policy rate at 2.5 percent on Thursday came with an unusual backdrop: a rare public intervention by the U.S. Treasury secretary and a detailed defense by a deputy governor, highlighting how Korean won's fragility has become central in both fiscal and monetary policy calculus.
The central bank unanimously voted to keep the benchmark rate unchanged at its first rate-setting meeting of the year, extending a pause that has been in place since May last year and signaling an effective halt to the latest easing cycle.
“I can easily say yes,” Bank of Korea Governor Rhee Chang-yong said at a press briefing after the monetary policy board meeting when asked whether the exchange rate had been the primary factor behind the decision.
Rhee said the won’s excessive depreciation reflects a “disparity with fundamentals,” adding that authorities are reassessing the effectiveness of various measures taken since late last year to support the currency.
He attributed roughly three-quarters of the won’s weakness to external factors — including a strong U.S. dollar, a weak Japanese yen and heightened geopolitical risks in regions such as Venezuela and Iran — with domestic factors accounting for the remaining quarter. A growing bias among investors toward overseas securities has also deepened short positioning on the won, amplifying downward pressure, he said.
The currency’s slide to its weakest levels since past crisis episodes — including the global financial crisis, the Asian financial crisis and the post-martial law period in late 2024 — even prompted unusually direct commentary from Washington.
U.S. Treasury Secretary Scott Bessent said in a post on X following a meeting with Deputy Prime Minister and Finance Minister Koo Yun-cheol that the won’s weakness was not aligned with South Korea’s economic fundamentals, a rare interventionist remark that briefly steadied market sentiment.
The markets went on their ways – the KOSPI hitting new historic high of 4,797.55 after 1.58-percent gain. The dollar added 5.40 won to 1.471.9 won.
Bond prices however crashed on hawkish tone. The three-year treasury yield surged 7.4 basis points to 3.070 percent, while the 10-year yield rose 5.4 basis points to 3.472 percent by midday.
Policy bind between household debt and skewed economic recovery
Too steep depreciation in the won that can fan imported inflation and capital flight builds rationale for higher rates.
But the scale of household debt continues to constrain the central bank’s policy options. Household debt stands at around 2,000 trillion won ($1.36 trillion), a level widely viewed as prohibitive for any rate hike.
A rate cut no longer can be an option since the Bank of Japan is expected to deliver its second consecutive rate hike later this month — a move that could intensify regional currency volatility and place additional pressure on the won.
Reflecting the shift in stance, the BOK removed references to “the possibility of a rate cut” from its post-meeting statement. Unlike the divided vote seen in November, Thursday’s decision was unanimous, with all six board members agreeing to hold rates steady.
Rhee said housing market imbalances and rising household debt remain key constraints on future policy decisions. He also pointed to a “K-shaped recovery” concentrated in semiconductors, alongside a declining potential growth rate, as structural pressures weighing on the broader economy.
“We will determine future policy by comprehensively weighing the exchange rate, the monetary paths of the United States and Japan, and the state of the domestic economy,” Rhee said.
The governor pushed back strongly against claims that loose liquidity conditions and modest rate cuts since the pandemic have structurally weakened the won.
“During my tenure, at the very least, M2 growth has never shown an upward trend,” Rhee said. His four-year term ends in April.
Deputy Governor Park Jong-woo reinforced that view, delivering a point-by-point rebuttal during the briefing — an unusually detailed defense at a rate-setting event.
“The M2 growth rate has remained at a consistently low level since 2022 and even declined in November,” Park said.
Addressing arguments that the won’s weakness stems from Korea’s higher M2-to-GDP ratio compared with the U.S. Park said the ratio has remained stable for several years. He cautioned against making simple numerical comparisons between Asian economies — which rely heavily on bank-intermediated finance — and the U.S. or eurozone, where capital markets play a more dominant role.
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