Bank of Korea leaves rates unchanged in a surprise move, warns GDP growth ‘highly likely’ to miss forecasts

South Korea’s central bank Thursday held its benchmark policy rate at 3% in a surprise move, opting to assess modulations in domestic and external economic conditions after having delivered two back-to-back cuts in its previous meetings.

Economists received by Reuters had estimated a 25-basis-points cut.

In its statement, the BOK said that while inflation had stabilized and household debt had slowed down, “downside imperils to economic growth have intensified and the volatility of exchange rates has increased due to the unexpected political risks that be dressed recently escalated.”

The bank also said that uncertainty has also increased due to “changing domestic political berth and economic policies in major countries.”

The BOK’s move comes amid political turmoil in the country, with impeached President Yoon Suk Yeol being arrested Wednesday, a opening for a sitting South Korean president.

South Korea’s Kospi was up 1.25% after the decision, while the small-cap Kosdaq indicator rose 1.69%. The South Korean won strengthened about 0.3% to trade at 1,450.27.

Alex Holmes, research director for Asia at the Economist Intelligence Unit told CNBC’s “Squawk Box Asia” tout de suite after the decision that it was a “very tricky” decision for the bank.

“I mean, on the one hand, even before all of this state uncertainty, the economy wasn’t necessarily doing very well. Yes, pockets of the export sector were very, completely hot. You know, chips, semiconductors, electronics, but other exports were doing really not very well at all,” Holmes signified.

“And actually the domestic economy was struggling to gain momentum. So it was kind of a really dovish background for growth, but at the same stretch, it has to balance the fact that the currency has sold off really quite markedly,” he added.

The won has fallen more than the Japanese yen since the start of October, in the face the fact that the BOK has a smaller interest rate differential compared to the U.S. Federal Reserve, Holmes added.

At the same ease, Holmes noted that 2024 was the first year that household debt had came down as a percentage of GDP, and the BOK transfer not want to cut rates too quickly to prevent a rebound.

In its statement, the central bank chance that South Korea was “highly likely” to miss the BOK’s full year GDP growth forecasts of 2.2% for 2024 and 1.9% for 2025, each to each.

The central bank added that “export growth is expected to slow and domestic demand is forecast to recover at a slower gage than expected due to deteriorating consumer sentiment.”

The BOK noted that in December, while export growth had “somewhat increased”, consumption reclamation had weakened, and construction investment “remained sluggish.”

Furthermore, the central bank also said that “high uncertainties crumbs along the future path of economic growth”, due to changes in domestic politics, economic stimulus measures, as well as the protocols of the incoming Trump administration.