EXCLUSIVE Bank of Korea’s Rhee says policy tightening unlikely to end before Fed

South Korea’s new central financial institution governor Rhee Chang-yong speaks throughout his inauguration ceremony in Seoul, South Korea April 21, 2022. SeongJoon Cho/Pool by way of REUTERS

JACKSON HOLE, Wyo./SEOUL, Aug 28 (Reuters) – The Financial institution of Korea (BOK) should maintain elevating rates of interest till the speed of inflation is in decline, however the central financial institution probably couldn’t halt its tightening earlier than the U.S. Federal Reserve, Governor Rhee Chang-yong mentioned on Saturday.

In an interview with Reuters, Rhee additionally mentioned South Korea’s central financial institution is able to take steps, together with intervention to stabilize the gained towards the greenback, if wanted, ought to the financial institution decide speculative forces are inflicting the forex’s fall.

Rhee’s feedback, on the sidelines of the Jackson Gap convention of central bankers within the U.S. state of Wyoming, dampened hypothesis that the BOK could be one of many first massive central banks to ease off within the world battle towards the steepest inflation in many years.

Asia’s fourth-largest financial system has been within the vanguard of world tightening. The BOK was among the many first central banks to desert pandemic-era financial stimulus, elevating its key coverage price by 2 share factors since August final yr to 2.5% (KROCRT=ECI). learn extra

Greenback appreciation pushed by Fed price will increase has added to inflation in lots of open economies all over the world, together with South Korea, as native currencies fall in worth.

“We at the moment are impartial from authorities, however we’re not impartial from the Fed,” Rhee mentioned. “So if the Fed continues to extend the rate of interest, it would have a depreciation stress for our forex.”

Though the BOK started elevating rates of interest earlier than the Fed, with its first hike a yr in the past, “whether or not we will finish earlier – I don’t assume so.”

South Korea’s inflation is essentially the results of exterior points comparable to vitality costs, Rhee mentioned.

“In case you ask me, whether or not I will cease … what occurs if the oil value will increase once more?” he mentioned. “It is very exhausting for us to know the precise timing, given the significance of the exterior shock.”

Regardless that he expects home inflation to sluggish in August in contrast with the 6.3% price seen in July, it’s “too untimely” to say it has peaked, particularly since, as winter approaches, fuel costs might once more rise. learn extra

The BOK raised charges by 1 / 4 level at its final assembly and mentioned additional quarter-point will increase “can be acceptable for a while so long as inflation paths stay as at the moment presumed.”

At this level, “I can’t say we’re forward of the curve,” Rhee mentioned. “So long as inflation stays excessive, which means 4%-5% … then we will certainly proceed to emphasise the normalization” of rates of interest.

EYE ON THE WON

Inflation in South Korea is forecast round 5% by the top of 2022, and to fall by 2023. Its central financial institution, like many others, targets 2% inflation.

At Jackson Gap, central bankers used largely the identical language to explain their battle towards rising costs. Although the headline drawback is similar – inflation far above their established targets – the sources of value stress and subsequently the coverage responses differ amongst international locations.

For smaller, open economies like South Korea’s, the scenario is especially advanced due to the spillover results from insurance policies set elsewhere.

Federal Reserve Chairman Jerome Powell on Friday kicked off the Jackson Gap convention by saying the Fed will increase charges as excessive as wanted to limit progress, and would maintain them there “for a while” to carry down inflation. learn extra

His speech sparked a sell-off in U.S. fairness markets, and Rhee mentioned on Monday consideration would flip to the gained.

The gained, one among Asia’s worst-performing currencies, has dropped about 11% towards the greenback this yr, and native officers have stepped up surveillance of the forex’s actions.

Rhee mentioned thus far he didn’t see the depreciation as pushed by hypothesis or South Korea’s financial fundamentals, however as a part of the greenback’s rising world energy.

“There are just a few days we see motion that is too extreme – however thus far I feel our change price motion could be very a lot consistent with main currencies,” Rhee mentioned.

However ought to the BOK detect speculative strikes in dollar-won buying and selling, he stands able to intervene in forex markets. The gained has been falling sooner than currencies in neighboring China and Japan, partly as a result of they keep free financial insurance policies, he mentioned.

Policymakers from President Yoon Suk-yeol to Finance Minister Choo Kyung-ho have stepped up their rhetoric to attempt to sluggish the gained’s decline repeatedly during the last week.

Prime Minister Han Duck-soo mentioned on Sunday the gained’s weak spot ought to assist South Korea’s financial system, in elements of exports and the present account, including that he hopes financial coverage could not need to be tightened by as a lot or as rapidly as in the USA.

“This depreciation stress as a result of greenback energy truly is a nasty issue for our inflation, as a result of our imported costs enhance rather a lot,” Rhee mentioned. However “the present depreciation stress doesn’t imply any liquidity issues or solvency issues, or credit score drawback for Korea.”

Reporting by Howard Schneider and Ann Saphir in Jackson Gap, and Cynthia Kim in Seoul; Further reporting by Jihoon Lee; Enhancing by William Mallard and Christopher Cushing

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