Bank of Korea’s Rhee keeps door open for outsized rate hike

Published Mon, Aug 29, 2022 · 06:33 AM

BANK of Korea Governor Rhee Chang Yong said he would join Federal Reserve Chair Jerome Powell in tightening the focus on inflation if prices remain out of control, keeping the door open for another outsized interest-rate hike.

Speaking in an interview with Bloomberg TV’s Kathleen Hays at Jackson Hole, Rhee said Powell’s remarks at the gathering of central bankers were largely in line with his expectations. 

But he added that higher US rates may still weaken the won further and lead to stronger inflation in Korea among other uncertain factors influencing policy.

“I do not want to pre-commit, because, given these uncertainties, our decision has to be data-based, but if our inflation rate continued to be well above 5 per cent, like Chairman Powell, the Bank of Korea should also prioritize price stability,” Rhee said when asked whether he would consider a half-percentage point rate hike.

In his speech at Jackson Hole, Powell clarified his intention to put the fight against spiraling prices ahead of growth concerns for the economy, as he reaffirmed his commitment to higher rates until inflation meaningfully eases. 

The message, reiterated by other central bankers at the gathering over the weekend, sent markets tumbling on Friday as hopes of any softening of the battle against inflation were squashed for now.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

VIEW ALL

The previous day, Rhee had signaled his preference for a continuation of quarter-percentage point increases after the BOK hiked rates by that amount. 

A continuation of larger-than-usual US increases is likely to add to pressure on the won.

The Fed has already closed the gap between borrowing costs in the US and Korea this year despite the BOK’s earlier start to the hiking cycle.

That has contributed to Korea’s currency weakening around 11% against the dollar this year. The won hit a 13-year low last week, sparking a warning from Korean authorities against speculative trades.

Currency volatility is a major concern for a trade-dependent economy like Korea. The BOK said in its policy statement last week that capital flows are among factors it is considering in future decisions.

“The interest-rate gap in itself is not our prime policy objective, but definitely a higher interest rate in the United States will have a depreciation pressure to Korea,” Rhee said.

“That depreciation will increase our inflation rate.” Rhee added that the BOK doesn’t target a certain exchange rate and that he would allow market dynamics to play out.

“Too large an interest-rate differential won’t be ideal,” he said. “But we have to allow the exchange rate to move and we have to focus on our own inflation rate through the indirect impact of exchange rate depreciation.”

Rhee said he expects inflation to slow below 3 per cent by the end of next year. The bank last week forecast annual inflation for 2023 to cool to 3.7 per cent.

Still, policy normalisation may last longer than markets expect if inflation remains stubbornly elevated, Rhee said.

Among the uncertain factors influencing the outlook are global oil and gas prices, China’s Covid policy and economic slowdowns in China and the US, Rhee said.

He noted the changing trade relationship between China and Korea, saying the world’s second-biggest economy is “becoming our competitor” because it is advancing its technology.

“The period that we really benefit from China as a factory of the world is coming to an end,” he said. “We have to adapt ourselves to the new global supply chain.”

As for criticism that global central bankers helped spark the current wave of inflation and had been too complacent about reining prices in, Rhee defended his peers.

Central banks worldwide underestimated the impact of Covid on supply chains as they rushed to “rescue people” from what essentially amounted to a war, Rhee said.

“At that time everybody was worried we may have another round of global financial crisis,” he said. “Criticising now that inflation is higher than expected – I think I have some mixed views on that.” BLOOMBERG

READ MORE

BT is now on Telegram!

For daily updates on weekdays and specially selected content for the weekend. Subscribe to  t.me/BizTimes

International

SUPPORT SOUTH-EAST ASIA'S LEADING FINANCIAL DAILY

Get the latest coverage and full access to all BT premium content.

SUBSCRIBE NOW

Browse corporate subscription here