South Korea pledges ‘optimal policy mix’ as market uncertainty grows

(Bloomberg) – Bank of Korea Governor Ri Chang-yong widened the door for a significant rate hike after another massive move by the Federal Reserve pushed the Japanese won below a key psychological level.

The Federal Reserve raised interest rates by 75 basis points overnight and forecast its benchmark index to reach 4.6% in 2023. Ri told reporters after hours that market expectations for the Fed’s rate of stability at around 4% had “changed a lot” and that the Bank of Korea It will be considered accordingly.

“I will assess with board members how changes in these preconditions affect domestic inflation, growth trends and foreign exchange markets to determine the extent, timing and path of interest rate hikes,” he told reporters after the currency fell below 1,400 against the dollar. . “But no decision has been made.”

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The won breached this symbolic level in early trading Thursday as Ri was meeting with Finance Minister Cho Kyung Ho and other economic policy makers. In a statement before the meeting, Cho said South Korea will “proactively manage short-term fluctuations, while also seeking the right policy mix that takes into account trends beyond next year.” After that, he said that Korea’s foreign exchange reserves could change as the authorities take steps to stabilize the markets, noting that the government could use the reserves to intervene in the currency market.

Ri’s comments increase the chance of the hard-line policy tightening for the rest of the year. The Bank of Korea has already raised interest rates five times this year, including a half-point increase in July which was the largest increase in history. The next decision on pricing will be on October 12th.

A depreciation of the won increases the price of imports and increases inflationary pressure. Ri said the BOK remains focused on fighting inflation and plans to provide new forward guidance after assessing price pressures, although he did not say when that would be announced.

“Markets are considering the opportunity for a significant rally not only next month but also in November,” said Roh Hyun-woo, strategist at Hanwha Asset Management. “Accelerating the tightening will act as a factor in reducing the pressure of the devaluation of the won, but it is likely that it will not stop the trend of increasing dollar strength.”

Yoon Yoo Sam, an analyst at Meritz Securities in Seoul, said the BOK could raise the rate to 3.5% by the end of the year — meaning a 50 basis point rise at each of the two remaining meetings in 2022 — to catch up with the Fed.

The higher rates may exacerbate the suffering of many Korean companies and consumers. Exporters, who are an important part of the economy, are seeing a slowdown in global trade momentum while higher energy prices are eroding their bottom line. Households are also burdened with rapid inflation, rising interest expenditures, and a declining real estate market which accounts for the largest share of personal assets.

The Bank of Korea expects inflation to remain in the 5-6% range for some time to come. While increases in consumer prices slowed slightly to 5.7% in August, increases in the past three months have been faster than anything since 1998. The Finance Ministry attributed the decline last month to easing oil prices and lowering fuel taxes.

The Bank of Korea was among the first central banks to raise interest rates in the developed world and is now entering its second year of policy tightening. Its rate is 2.5% and could rise to 3.75% over the next six months, according to Bloomberg’s calculations.

© Bloomberg LP 2022

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