More risks for the economy
High inflation and depreciating Korean won call for caution from BOK policymakers

Russia’s invasion of Ukraine, which is exacerbating already struggling global supply chains, is not the only headache facing the Korean economy. There is a growing list of risk factors, some of which warrant careful analysis and, if necessary, decisive action.

As in other parts of the world, including the United States and Europe, inflation poses the most immediate and insidious threat. As if the war in Ukraine weren’t bad enough, Indonesia’s surprise palm oil export ban is forcing small Korean restaurant and food delivery operators to find alternatives, or swallow sharply declining profits, or even losses.

Prices are soaring for other items, ranging from energy prices to consumer goods largely based on imports. Consumer prices in Korea rose 4.1% in March from a year ago, the fastest annual gain in more than 10 years due to rising commodity prices.

Rapidly rising consumer prices, spurred by rising commodity prices and shortages of imported components from other countries, are eroding consumers’ purchasing power, which in turn could dampen domestic consumption and darken future growth prospects.

No wonder Governor Rhee Chang-yong, the new head of the Bank of Korea, said on Monday that he was more concerned about inflation than economic growth. Rhee’s stance at his first press conference since taking office marks a shift in tone from his earlier focus on growth rather than inflation.

Rhee’s remark came after the International Monetary Fund raised its inflation projection for Korea to 4% from 3.1% and lowered its growth outlook for 2022 to 2.5% from a previous projection of 3. %.

The central bank also predicted that high inflation at this rate would drive up wages for Korean workers, adding upward pressure on prices in a vicious circle.

However, Rhee did not send a clear sign for another interest rate hike in May, saying the BOK will closely monitor the US Federal Reserve’s next rate decision. Fed Chairman Jerome Powell said on Thursday that a half-percentage-point rate hike “will be on the table for the May meeting,” suggesting he is keen to contain high inflation at a faster pace and calm the overheated US economy.

But the BOK is unlikely to emulate the Fed by significantly raising the benchmark rate in the coming months. The central bank has already raised its key rate by a quarter of a percentage point in mid-April. It was the fourth rate hike since August last year.

Rhee said the central bank would monitor the financial market to see if the Fed’s rapid rate hikes, including an imminent “big step”, could trigger capital outflows coupled with the weakening of the Korean won against the dollar. American. He downplayed the risk of a weaker local currency, saying the depreciation of the won has not been as severe as that of the euro and other currencies.

But it remains to be seen whether the Korean won will maintain its value even if foreign investors abandon Korean equities and head to the United States to seek higher interest income. The Korean won depreciated 12.7% against the dollar from a year earlier.

In fairness, Korea is in a relatively better position than Japan in terms of exchange rates, given that the Japanese yen has fallen to its lowest level in 20 years against the dollar.

But there is no room for complacency, as the continued weakening of the Korean Won will push prices higher. The growth data isn’t pretty either. The country’s gross domestic product grew 0.7% in the first quarter of this year, decelerating from a 1.2% increase in the fourth quarter of 2021, BOK data showed on Tuesday. The country is urged to take proactive measures without delay, including the currency swap agreement with the United States.