(Bloomberg) -- Bank of Korea Governor Rhee Chang-yong said Wednesday that the ongoing political turmoil in South Korea weighs on the economy, suggesting authorities may downgrade growth forecasts and take stabilizing actions in response.
There’s a high chance South Korea’s gross domestic product will grow 2.1% this year rather than 2.2% as projected earlier, Rhee said as he assessed the economic impact of the turbulence that began when President Yoon Suk Yeol briefly imposed martial law in early December.
Rhee also raised doubts about whether the economy next year would expand 1.9% as forecast in November, calling for more fiscal support and other measures to ensure growth remains unimpeded.
The BOK is scheduled to make its next interest-rate decision in January. Rhee said the BOK will consider economic data to determine whether the central bank may accelerate its policy.
Most economists expect the BOK to take a breather next month after back-to-back cuts from October to November. A rate cut by the Federal Reserve later this week may give the BOK more room for easing if necessary, Rhee said.
Rhee expressed some relief over a decrease in political uncertainty after the parliament last week voted to impeach Yoon for his martial law debacle. Constitutional judges will now rule on the validity of the vote within 180 days.
“Volatility in domestic financial and foreign exchange markets has shown signs of stabilization after surging in the wake of the martial law declaration,” Rhee said. “While uncertainty remains, the political schedule ahead is now considered somewhat clearer.”
After turmoil erupted over the martial law decree, the authorities intervened in foreign exchange markets via what they call smoothing operations and will continue to do so should volatility become excessive, Rhee added.
The won has weakened by about 30 won against the dollar since the martial law decree, he said. Its level, which stands at about 1,435 per dollar as of Wednesday, should “normalize” according to economic fundamentals if South Korea’s policymaking process becomes stable again, he said.
Rhee spoke during a regular briefing on consumer inflation, which he said is expected to stay stable around the BOK target of 2% next year.
