Bank of Korea’s Rhee says rates will rise until inflation is beaten

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JACKSON HOLE — Bank of Korea Governor Rhee Chang-yong said on Saturday that interest rates should continue to rise until inflation drops, but the country is unlikely to be able to halt its tightening cycle ahead of the US Federal Reserve.

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

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“We are now independent of the government, but we are not independent of the Fed. So if the Fed continues to raise the interest rate, there will be pressure to depreciate our currency,” Rhee said in an interview with Reuters. Although the Bank of Korea started raising interest rates ahead of the Fed, with its first hike a year ago, « if we can finish earlier, I don’t think so. »

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Inflation in Korea is largely the result of external issues like energy prices, Rhee said, and, « if you ask me, if I’m going to stop…what if the price of oil rises again? … It is very difficult for us to know the exact timing, given the size of the external shock.

Although he expects domestic inflation to decline 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 Bank of Korea raised interest rates a quarter-point at its last meeting to 2.5%, and said further quarter-point hikes « will be appropriate for a while as long as inflation paths will remain as currently assumed. »

The breakpoint, Rhee said, would depend on the behavior of inflation.

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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 Korea is expected to hover around 5% by the end of 2022 and fall through 2023. Its central bank, like many others, is targeting 2% inflation.

Rhee spoke on the sidelines of a Fed research conference where global central bankers used much the same language to describe their common battle against rising prices. Although the main problem is the same – inflation far beyond the established targets – the sources of pressure on prices and therefore the policy responses differ from one country to another.

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

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Even the fallout from Fed Chairman Jerome Powell’s speech here on Friday, which sparked a sell-off in U.S. stock markets, would be watched, Rhee said, keeping an eye on the won’s open in trading. of Monday. The Fed Chairman promised that US interest rates would move to “restrictive” levels and stay there for as long as necessary to reduce US inflation.

The won has fallen about 11% against the dollar this year, and local authorities have stepped up monitoring of currency movements.

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

“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. « This depreciation pressure from the strong dollar is actually a bad factor for our inflation, because our import prices are going up a lot, » he said, but « the current depreciation pressure doesn’t mean liquidity issues. or solvency, or credit problem for Korea. »

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Rhee said he was likely to encounter new geopolitical problems, with the war in Ukraine causing rising energy costs and tensions between the United States and China.

« It’s a huge downside risk for us – geopolitics and the US-China tension is, I think, a very big factor, » he said.

But he also said there was an opportunity for Korea as the global economy reorganized in the aftermath of the pandemic.

However, the main priority now is to defeat inflation, a problem shared around the world, although the causes may differ.

« I can really see that the situation and the challenges that the United States is facing are quite different from the headaches and challenges that I’m facing, and probably my European colleagues are facing, » Rhee said. But for everyone “it is important for us to continue to prioritize inflation”.

(Reporting by Howard Schneider Editing by Nick Zieminski)