Bank of Korea’s Rhee says policy tightening shouldn’t end until the Fed

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JACKSON HOLE — The Bank of Korea (BOK) needs to keep raising interest rates until the inflation rate drops, but the central bank probably couldn’t stop tightening before the U.S. Federal Reserve said. Governor Rhee Chang-yong on Saturday.

In an interview with Reuters, Rhee also said South Korea’s central bank was ready to take action, including intervention to stabilize the won against the dollar, if necessary, if the bank determines that speculative forces are causing the fall of the currency.

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Rhee’s comments, on the sidelines of the Jackson Hole central bankers’ conference in the US state of Wyoming, cooled speculation that the BOK could be one of the first major central banks to slack off in the global battle against the highest inflation in decades.

Asia’s fourth-largest economy has been at the forefront of the global tightening. The BOK was among the first central banks to abandon pandemic-era monetary stimulus, raising its key rate by 2 percentage points since August last year to 2.5%.

Dollar appreciation driven by Fed rate hikes has fueled inflation in many open economies around the world, including South Korea, as local currencies lose value.

“We are now independent from the government, but we are not independent from the Fed,” Rhee said. « So if the Fed continues to raise the interest rate, it will have pressure to depreciate our currency. »

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Although the BOK started raising interest rates before the Fed, with its first hike a year ago, « if we can finish earlier, I don’t think so. »

South Korea’s inflation is largely the result of external issues such as energy prices, Rhee said.

“If you ask me if I’m going to quit… what if the price of oil goes up again? he said. « It is very difficult for us to know the exact timing, given the magnitude of the external shock. »

Although he expects domestic inflation to slow in August from the 6.3% rate seen in July, it is « too premature » to say that it has peaked, especially that as winter approaches, gasoline prices could rise further.

The BOK raised rates by a quarter-point at its last meeting and said further quarter-point hikes « will be appropriate for some time as long as inflation paths remain as currently assumed. » .

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At this point, « I can’t say we’re ahead of the curve, » Rhee said. “As long as inflation remains high, i.e. 4%-5% … then we will certainly continue to emphasize the normalization” of interest rates.


Inflation in South Korea is forecast around 5% by the end of 2022 and is expected to decline through 2023. Its central bank, like many others, is targeting 2% inflation.

In Jackson Hole, central bankers used much the same language to describe their fight against rising prices. Although the main problem is the same – inflation well above the established targets – the sources of pressure on prices and therefore the policy responses differ from one country to another.

For small open economies such as South Korea, the situation is particularly complex due to spillovers from policies implemented elsewhere.

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Federal Reserve Chairman Jerome Powell kicked off the Jackson Hole conference on Friday by saying the Fed would raise rates as high as necessary to limit growth and hold them « for a while. » to lower inflation.

His speech sparked a sell-off in U.S. stock markets, and Rhee said on Monday the focus would turn to the won.

The won, one of Asia’s worst-performing currencies, has fallen about 11% against the dollar this year, and local authorities have stepped up monitoring of the currency’s movements.

Rhee has said so far that he does not view the depreciation as driven by speculation or South Korea’s economic fundamentals, but as part of the dollar’s growing global strength.

“A few days ago we see too much movement – ​​but so far I think our exchange rate movement is very much in line with major currencies,” Rhee said.

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But if the BOK detects speculative movements in the earned dollar trade, it is ready to intervene in the foreign exchange markets. The won has fallen faster than the currencies of neighboring China and Japan, in part because they maintain loose monetary policies, he said.

Policymakers from President Yoon Suk-yeol to Finance Minister Choo Kyung-ho have stepped up their rhetoric in an attempt to slow the won’s decline on several occasions over the past week.

Prime Minister Han Duck-soo said on Sunday that the won’s weakness should help South Korea’s economy, both in terms of exports and the current account, adding that he hopes monetary policy will not have to be tightened as much or as quickly as in the United States. .

« This depreciation pressure from the strong dollar is actually a bad factor for our inflation, because our import prices are going up a lot, » Rhee said. But « the current depreciation pressure does not mean liquidity or solvency problems, nor a credit problem for Korea. » (Reporting by Howard Schneider and Ann Saphir in Jackson Hole, and Cynthia Kim in Seoul; Additional reporting by Jihoon Lee; Editing by William Mallard and Christopher Cushing)



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