[Editor's note] Political uncertainty in South Korea increased due to martial law and an impeachment situation at the end of 2024. Amidst this, the second Trump administration takes office on Jan. 20. The return of U.S. President Donald Trump, who ignored existing international trade principles and proposed 'new norms,' adds to the uncertainty for export powerhouse South Korea. The reality of South Korea in 2025, 'eulsanyun,' is summarized as 'internal discord and external threats.' How will this crisis be navigated? The report includes economic forecasts and recommendations from 34 domestic economic experts.
Domestic macroeconomic experts predicted that the benchmark interest rate would drop to 2.5% by the end of the year. This expectation is due to the increased likelihood of sluggish domestic consumption amid expanding political uncertainty, such as martial law and the impeachment of the president, highlighting the need for a rate cut to boost the economy. The current rate is 3.0%. Experts, however, noted that with rising financial instability risks like the surging won-dollar exchange rate and the inauguration of Donald Trump as U.S. president in January, global economic uncertainty might increase, and the pace of cuts is expected to be slow.
◇ Only half of experts say the speed of currency policy transition is appropriate
On the 1st, a survey by CHOSUNBIZ of 34 domestic economic experts revealed that half of the respondents, 17 experts, found the speed of the Bank of Korea's currency policy transition appropriate. Twelve experts (35.3%) felt the transition was slow, and one expert (2.9%) said it was very slow. Three experts (8.8%) believed the transition was fast.
Diverging assessments of the Bank of Korea's currency policy stem from simultaneous signs of economic slowdown and financial instability potential. Concerns about a slowdown surfaced as last year's gross domestic product (GDP) growth rate, initially expected at 2.5%, is now predicted to plummet to around 2.0%. A significant factor was sluggish exports due to intensified competition in the semiconductor market. Recently, consumer sentiment has weakened, further destabilizing the recovering domestic market.
Financial instability is becoming an issue as political uncertainty both domestically and internationally causes the won-dollar exchange rate to soar. Domestically, the aftermath of martial law and the impeachment situation is impactful, while internationally, Donald Trump's win in the U.S. presidential election is influential. The won-dollar exchange rate has surpassed 1,470 won, the highest level since the International Monetary Fund (IMF) crisis and the global financial crisis of 2008. The Korea Composite Stock Price Index (KOSPI) has fallen below 2,400.
Focusing on economic slowdown implies lowering interest rates to stimulate domestic demand, while financial stability concerns necessitate maintaining a tightening stance. Experts, however, are divided on this issue. Among respondents, 20 (58.8%) prioritized addressing domestic consumption decline as the main task for the Bank of Korea's currency policy, while nearly half, or 14 (41.2%), prioritized financial stability.
The presence of dissenting opinions in the Monetary Policy Committee's consecutive monthly currency policy decision meetings underscores the difficulty of rate decisions. During a meeting on Nov. 28 last year, four out of six committee members, excluding Bank of Korea Governor Lee Chang-yong, supported a rate cut, while Commissioners Yoo Sang-dae and Jang Yong-seong advocated holding steady. Commissioner Jang had also issued a dissenting opinion calling for holding rates during an Oct. 11 meeting the previous year.
◇ Interest rate cuts likely to be slow; more than half anticipate two cuts
Interest rate cuts by the Bank of Korea are expected to proceed slowly this year. Among respondents, 18 (52.9%) predicted that the current benchmark rate of 3.00% would fall to 2.5% by the end of the year, indicating an expectation of two 0.25% point (p) cuts. Among the remaining respondents, six (17.6%) anticipated a rate of 2.75%, another six predicted 2.25%, and four (11.8%) foresaw 2.0%.
The increased potential for medium- to long-term financial instability is a factor hindering rate cuts. According to the Bank of Korea's 'Financial Stability Report' published last month, the 'private credit leverage,' which refers to the ratio of private credit to nominal GDP, was 202.7% as of the end of the second quarter last year. A sharp rate cut risks improving borrowing conditions, leading to a surge in loans and increased financial vulnerability.
The slowing pace of the U.S. Federal Reserve's rate cuts is also expected to have an impact. The Fed, in its dot plot (a chart showing expected future policy rates by board members and governors) released on Dec. 18 (local time) last year, raised its year-end policy rate projection (median) from 3.4% to 3.9%. Considering the current benchmark rate of 4.25-4.50%, the reduction scope is likely to decrease from four to two 0.25% point (p) cuts.
Expectations from experts did not differ significantly. Among respondents, none believed the Fed would maintain the current benchmark rate of 4.25-4.50% by year-end. The largest number, 13 respondents (38.2%), anticipated a rate of 3.75-4.00%, followed by nine (26.5%) expecting 3.50-3.75%, seven (20.6%) expecting 3.25-3.50%, four (11.8%) expecting 4.00-4.25%, and one (2.9%) anticipating 3.00-3.25%.
◇ More frequent 'policy coordination' expected between the Bank of Korea and government... "Utilizing a variety of policy tools"
The Bank of Korea, with limited room to maneuver, has signaled its intention to use various measures, including currency policy, macroprudential policy, and forex market intervention, to achieve economic stability. Bank of Korea Governor Lee Chang-yong highlighted this in a keynote speech at a 'Winter Academic Conference' hosted by the Korean Economic Association at the Future Hall of the University of Seoul in Dongdaemun-gu, Seoul, on Dec. 23.
Governor Lee noted that "potential instability in the financial and foreign exchange markets due to external shocks remains, and there is also a greater potential conflict between policy goals such as price stability and financial stability." Lee stated, "Moving forward, the Bank of Korea will pursue price stability as a key policy goal through inflation targeting, while actively utilizing a range of policy tools under an integrated policy framework to also ensure financial stability and mitigate foreign exchange market volatility."
The Bank of Korea previously applied various measures to respond to financial and foreign exchange market instability in the second half of 2022 and rising house prices in Aug. last year. In 2022, it implemented rate hikes while intervening in the foreign exchange market to stabilize it, and in Aug. last year, it maintained rates while collaborating with macroprudential policies such as tightening the stress Debt Service Ratio (DSR) regulation to alleviate the pressure of increasing financial imbalance.
In its 'Currency Credit Policy Operational Direction' released on Dec. 25, the Bank of Korea stated, 'We will continue to share awareness of the financial and economic situation with policymakers during 'Macro Economic Financial Meetings' and will maintain policy coordination in necessary institutional sectors like financial stability.' The Bank of Korea also mentioned 'enhancing global financial safety nets and extending maturing currency swaps to improve the capacity to absorb external shocks.'
◇ Participants in the survey
▲ Kang Min-joo, ING Bank institutional sector head ▲ Kang Seong-jin, Korea University professor ▲ Ko Tae-bong, iM Securities managing director ▲ Kwak No-sun, Sogang University professor ▲ Kim Sang-bong, Hansung University professor ▲ Kim Sang-hoon, KB Securities research division head ▲ Kim Seong-hyeon, Sungkyunkwan University professor ▲ Kim Seung-hyeon, Yuanta Securities Research Center head ▲ Kim Ji-yeon, Korea Development Institute outlook team lead ▲ Kim Jin-il, Korea University professor ▲ Kim Hak-kyun, Shin Young Securities Research Center head ▲ Kim Hyun-soo, Korea Chamber of Commerce and Industry economic policy team leader ▲ Park Seon-young, Dongguk University professor ▲ Park Hee-chan, Mirae Asset Securities Research Center head ▲ Baek In-suk, Korea Capital Market Institute senior research fellow ▲ Seok Byeong-hoon, Ewha Womans University professor ▲ Shin Kwan-ho, Korea University professor ▲ Woo Seok-jin, Myongji University professor ▲ Yoo Jong-min, Hongik University professor ▲ Yoo Jong-o, Korea Investment & Securities research division head ▲ Yoon Sang-ha, Korea Institute for International Economic Policy international macro team leader ▲ Lee Geun, Seoul National University professor ▲ Lee Byung-gun, DB Financial Investment Research Center head ▲ Lee Seung-woo, Eugene Investment & Securities Research Center head ▲ Lee Seung-hoon, Meritz Securities economist ▲ Lee Jong-hwa, Korea University professor ▲ Jun Kwang-woo, Institute for Global Economics chairman ▲ Jeong Young-sik, Korea Institute for International Economic Policy international macro finance director ▲ Cho Kyung-yeop, Korea Economic Research Institute senior research fellow ▲ Cho Jang-ok, Sogang University emeritus professor ▲ Joo Won, Hyundai Research Institute economic research director ▲ Heo Jun-young, Sogang University professor ▲ Hong Ki-seok, Ewha Womans University professor ▲ Hwang Seung-taek, Hana Securities Research Center head