South Korea central bank sees upside inflation risk with a weaker won

[SEOUL] South Korea’s central bank said on Wednesday (Dec 17) that headline inflation in 2026 could exceed earlier forecasts, if the won stays at its current level against the dollar.

“If the KRW-USD exchange rate continues to stay at the current high level of around 1,470 won (S$1.28) throughout next year, the consumer-price growth rate could rise to the early-to-mid 2 per cent range, slightly surpassing our current projections,” the Bank of Korea (BOK) said in a biannual report on inflation.

It said a sustained dollar-won rate near the current level of 1,470 won per dollar could trigger a spillover effect on consumer prices, and raise domestic inflation.

South Korea’s headline inflation rose to 2.4 per cent in November from a year earlier, and stayed above the BOK’s target level of 2 per cent for a third straight month.

Governor Rhee Chang-yong said the bank would ensure that dollar outflows – which are expected to occur with a promised US$350 billion investment fund, as part of the country’s trade deal with the US – do not hurt foreign-exchange stability.

Rhee also said it was time for the National Pension Service (NPS) to pay “more attention to the macroeconomy as it is now a major player in the market, unlike a decade ago”, as he repeated calls for the NPS to use currency hedging when buying overseas assets.

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The NPS, the world’s third-largest pension fund, has been increasing overseas equity investment in recent years by buying dollars in the onshore foreign-exchange market, helping drive the won lower.

On Wednesday, the won weakened 0.5 per cent to 1,480.4 won per dollar, near its 16-year low. REUTERS