After experiencing the "double kill" of stocks and foreign exchange caused by political turmoil, the Bank of Korea took action to "rescue the market".
The Bank of Korea announced on Wednesday that it plans to further lower its benchmark interest rate in 2025 due to increased political uncertainty and other downside risks. The Bank of Korea has also promised to implement market stability measures at the appropriate time if necessary.
After the emergency martial law storm, the South Korean financial market was turbulent and the stock market fluctuated violently, with the South Korean Composite Index experiencing a cumulative decline of over 4%; At the same time, the exchange rate of the Korean won against the US dollar depreciated by over 3%, and last week it fell below the level of 1450 Korean won per US dollar, hitting a new low since the 2009 global financial crisis. At present, the exchange rate of the Korean won against the US dollar fluctuates around 1457.
Affected by the ongoing political turmoil in South Korea, foreign investors sold over 3 trillion Korean won, or approximately 15.3 billion yuan, in the South Korean stock market from December 4th to 20th, following the announcement of "emergency martial law" by South Korean President Yoon Suk yeol.
Bank of Korea: Will further cut interest rates
On December 25th local time, the Bank of Korea, the central bank of South Korea, released its 2025 monetary policy report. Bank of Korea stated that it will flexibly adjust the pace of benchmark interest rates and reduce them according to changes in economic conditions to ensure stable inflation and alleviate downward pressure on economic growth, while also paying attention to financial stability risks. We will strengthen the monitoring and risk management mechanisms for the stability of the financial foreign exchange market and financial system, and promptly take market stability measures when necessary.
Bank of Korea stated that due to increased political uncertainty and other downside risks, it plans to further lower its benchmark interest rate next year. In making interest rate decisions, the Bank of Korea will consider increased political uncertainty, intensified competition in major industries (with global competitors), and expected changes in the global trading market, "the Bank of Korea stated in a report
Bank of Korea pointed out that from the perspective of financial stability, with the smooth implementation of macroprudential policies, household debt is expected to continue to slow down. However, the bank needs to continue monitoring the impact of interest rate cuts. Attention should also be paid to how changes in the monetary policies of major countries and domestic and international political uncertainties affect exchange rate fluctuations. Bank of Korea will flexibly determine the pace of future interest rate cuts based on the development of domestic and global risk factors, resulting inflation, growth trends, changes in financial stability, and policy variables.
Given the significant uncertainty surrounding the economic policy direction of the new Trump administration in the United States, particularly with regards to tax cuts, tariffs, immigration policies, and regulatory issues, Bank of Korea will strengthen its monitoring and early warning systems for the financial market and system, and implement market stability measures in a timely manner when necessary. Korean banks will conduct joint inspections to analyze the liquidity and credit risks of financial institutions, household and corporate debt risks, and bankruptcy situations in real estate project financing from multiple perspectives. Bank of Korea will share its views on the financial and economic situation and continue to coordinate policies with other policy authorities in necessary areas such as financial stability through channels such as macroeconomic and financial stability conferences. The bank will closely monitor risk factors in the domestic and foreign exchange sectors and take additional stabilization measures to address excessive volatility. Bank of Korea will ensure sufficient foreign exchange liquidity when necessary and work with the government to consider relaxing macro prudential measures for foreign exchange.
In order to enhance its ability to absorb external shocks, the Bank of Korea will actively participate in discussions to strengthen the global and regional financial safety net, and plans to extend the currency swap agreement that is about to expire. At the same time, Korean banks will continue to work hard to stabilize the improvement of the foreign exchange market structure, including taking measures to promote the trading of registered foreign investors.
Bank of Korea stated that it will continue to work towards improving its loan mechanism to enhance its role in maintaining financial stability. To promote financial institution loans as qualified collateral for loan facilities, Bank of Korea will develop IT systems and establish relevant regulations. To ensure timely provision of liquidity to non bank financial institutions when necessary, the bank will continue to improve relevant laws and regulations. Regarding the intermediary loan support mechanism of banks, given the increasing uncertainty at home and abroad, Korean banks will explore medium - and long-term measures to enhance the effectiveness of the mechanism and continue to support vulnerable groups.
On November 28th, Bank of Korea unexpectedly lowered its benchmark interest rate by 25 basis points to 3%, a move that exceeded market expectations and aimed to address the multiple challenges facing the South Korean economy, including declining exports, weak domestic demand, and inflationary pressures. The bank pointed out that the high level of uncertainty brought by the new US government, which will take office in January next year, to the global economy is one of the important factors that prompted the decision to cut interest rates. The Bank of Korea has also taken interest rate cuts for the second consecutive month as a result.
In August 2021, the Bank of Korea raised its benchmark interest rate from 0.5% to 0.75%, ending a 15 month period of historically low benchmark interest rate easing monetary policy. Subsequently, it raised interest rates multiple times until January 2023, and then maintained the benchmark interest rate at 3.5% until the policy shift in October of this year.
Foreign investors sell off Korean assets
Recently, the ongoing political turmoil in South Korea has led to a continuous sell-off of its assets by foreign investors.
According to data from the Korean Stock Exchange on December 21st, foreign investors sold over 3 trillion Korean won worth of Korean stocks, approximately 15.3 billion yuan, in 13 trading days from December 4th to 20th, following the announcement of "emergency martial law" by South Korean President Yoon Suk yeol. On the first trading day after the "emergency martial law", December 4th, foreign net sales reached 407.9 billion Korean won.
The Korean Herald analyzed that Samsung Electronics' sluggish performance, the strong US dollar, and the depreciation of the Korean won exchange rate are all reasons why foreign investors have sold off Korean assets in recent months. The turmoil in the domestic political situation in South Korea has also intensified the outflow of foreign investment.
In the foreign exchange market, the Korean won has also experienced sustained selling. At the close of December 24th, it had depreciated to 1 US dollar against 1456.4 Korean won. According to an analysis by the Korean Central Daily News, the main reasons for the depreciation of the Korean won are the Federal Reserve's interest rate cuts, weak economic growth in South Korea, and political instability.
The survey results of the Korea Small and Medium Enterprises Association on the 16th showed that after the outbreak of martial law, 46.9% of the surveyed restaurant and hotel enterprises faced losses such as customer cancellations of year-end event orders. Among the undamaged enterprises, 46.6% are concerned that their subsequent operations will be affected. In addition, the survey results released by the Korea Small and Medium Enterprises Association on the 18th showed that 26.3% of surveyed small and medium-sized export enterprises reported economic losses due to political turmoil; 63.5% of the surveyed enterprises are concerned about the adverse impact on their subsequent export business.
CCTV News quoted South Korean media as saying on the 25th that South Korean President Yoon Seok yeol once again refused to go to the Public Mediation Office for investigation on that day.
According to Yonhap News Agency, Yoon Seok yeol did not appear at 10 am as required for investigation on the same day. The Public Mediation Office stated that it will wait for Yin Xiyue to appear on time. If Yin Xiyue fails to appear on time, the Public Mediation Office will consider a third summons.
On the 20th, the Joint Investigation Headquarters, jointly established by the South Korean Police Agency, Public Security Office, and Ministry of National Defense, requested Yoon Seok yeol to appear at 10:00 am local time on the 25th for investigation on suspicion of internal strife and abuse of power. Previously, on the 16th, the "Joint Investigation Headquarters" had requested Yin Xiyue to appear at the case on the 18th for investigation, but Yin Xiyue refused the summons notice.
Analysis suggests that due to domestic political turmoil in South Korea and expected policy changes from incoming US President elect Trump, the South Korean economy will face challenges in the coming year.
On December 18th, the Governor of Bank of Korea (Bank of Korea), Lee Chang yong, attended a briefing on the achievement of price stability targets and stated that South Korea's economic growth rate this year is likely to be 2.1%, which is 0.1 percentage points lower than the Bank of Korea's previous expectation of 2.2%. On the same day, Li Changyong stated at the meeting that the previously expected growth rate for the fourth quarter of this year was 0.5%, but it seems that it may drop to 0.4% or even lower at present. Li Changyong pointed out that although exports have maintained growth, the bank card swipe amount in consumption indicators has not met expectations, leading to a significant decline in economic confidence index. Regarding next year's economic growth rate, Lee Chang yong stated that the previous expectation was 1.9%, but with the passage of budget cuts by Congress, the downward pressure on the economy has further increased.
South Korean Finance Minister Choi Sang mu stated on Monday (December 23) that South Korea's economic growth rate next year may fall below 2% due to various downside risks, including recent domestic political turmoil.
Cui Xiangmu said at a press conference, "Considering the significant downside risks, next year's growth forecast may be revised downwards and may be slightly lower than the country's potential growth rate." He emphasized that consumer confidence has weakened after the martial law scandal earlier this month. Although this is not a crisis level outlook, the expansion of uncertainty brings challenges, "Cui Xiangmu added.