News Tech: Rhee Chang-yong, the governor of the Bank of Korea, extended the window for a large interest rate increase after another big move by the Federal Reserve drove the won below a crucial psychological threshold.
Just after the currency slipped past 1,400 to the dollar, he told reporters, “I will examine with the board members how the changes in these preconditions affect domestic inflation, GDP trends, and foreign exchange markets to decide the size, timing, and trajectory of rate hikes. But nothing has been decided. For the first time since the financial crisis, the South Korean won surpasses 1,400 per dollar.
The Fed predicted that its benchmark rate would reach 4.6% in 2023 and increased rates by 75 basis points overnight. Hours later, Rhee told reporters that the BOK will consider taking appropriate measures because market expectations for the Fed rate to steady at roughly 4% had “shifted a lot.”
Powell warns that crushing inflation may have to be paid for with a recession.
The won’s depreciation raises import costs and exerts further inflationary pressure. Rhee stated that the BOK’s primary goal is to combat inflation and that he intends to release fresh forward guidance after analysing pricing pressures, although he did not specify a timeframe for doing so.
Roh Hyun-woo, a strategist at Hanwha Asset Management, stated that “markets are assessing the possibility of a big-step hike not only next month but also in November.” “The acceleration of tightening would serve as a factor lowering the pressure on the won to depreciate, but will probably fall short of reversing the trend of increased dollar strength,” the author writes. In order to catch up with the Fed, the BOK may raise the rate to as much as 3.5% by the end of the year, which would need an increase of 50 basis points at each of the final two meetings in 2022, according to Yoon Yeo-sam, an analyst at Meritz Securities in Seoul.
Higher rates could make things worse for many Korean consumers and businesses. Exporters, who play a significant role in the economy, are facing a slowdown in the pace of international commerce, and high energy prices are hurting their financial situation. Fast inflation, rising interest costs, and a slump in the real estate market, which makes up the greatest portion of household assets, are further burdens on households. The BOK anticipates that inflation will continue to be in the 5-6% range for some time. Despite a minor slowdown to 5.7% in consumer price increases in August, the hikes over the prior three months have been the fastest since 1998. The decrease last month was ascribed by the Finance Ministry to a drop in oil prices and a reduction in fuel taxes.
The BOK is beginning its second year of tightening policy after being one of the first central banks in the industrialised world to boost rates. According to estimations by Bloomberg, its rate is currently 2.5% but might increase to as much as 3.75% in the upcoming six months.