The Bank of Korea is well placed to respond to uncertainties surrounding Federal Reserve policy and China’s economic recovery, Governor Rhee Chang-yong said Friday, a day after keeping interest rates unchanged.
(Bloomberg) — The Bank of Korea is well placed to respond to uncertainties surrounding Federal Reserve policy and China’s economic recovery, Governor Rhee Chang-yong said Friday, a day after keeping interest rates unchanged.
“When the situation is very foggy, it’s better to stop the car and see what will be the next move,” Rhee said in an interview Friday with Bloomberg Television’s Haslinda Amin.
“There are huge uncertainties abroad” including how high US interest rates will climb and for how long, the governor said. The impact of China’s reopening on Korea’s exchange rate and economy is another, he added.
With the comments, the governor indicated he was still ready to take action if needed and that market players should not assume the BOK is done with its tightening cycle given the known unknowns.
The BOK held borrowing costs Thursday as the board opted to assess the impact of its rate hikes. South Korea was in the policy vanguard when it began raising rates in August 2021 and is now among the first central banks to stand pat.
Rhee said Thursday that five of six board members wanted to retain the option to increase rates by another quarter-percentage point if necessary from the current 3.5% level. That is up from three members last month, suggesting a consensus had formed on the need to stay on guard against inflation amid ongoing risks.
Speculation is mounting that the Fed will have to ramp up its pace of tightening again, chatter that has helped weaken the won against the dollar this month. A renewed depreciation would boost the cost of food and energy imports that Korea relies upon, meaning rapid Fed hikes could trigger another acceleration in Korean inflation.
“When we paused the interest, probably for the first time among major countries, I have to admit that I was slightly worried about how the exchange rate would behave,” Rhee said. “But yesterday actually the exchange rate appreciated.”
“So for the time being it really shows that the major driver of our exchange rate is not our decision but how people believe the US monetary policy will go in the future. So that is a very complex equation to solve.”
The BOK doesn’t target a certain level for the exchange rate, Rhee said. But if and when volatility jumps and the sentiment among investors “goes to the extreme, then we have to think about several measures on how to correct it,” he said.
Among other concerns for the BOK are an export slump and a property-market correction. Korea’s overseas shipments continue to fall due to waning worldwide semiconductor demand, while the domestic housing market has entered a steep correction.
National prices and those of Seoul apartments have cumulatively fallen 18.9% and 24.6%, respectively, since their 2021 peaks, according to Citigroup Inc.
The downturn has resulted in a fall in Korean household borrowing that’s already been under pressure from rising rates. Growing difficulties among households to secure credit has contributed to a slowdown in consumption.
“The real estate sector is a relatively big sector in Korea,” Rhee said. “The current situation is a good adjustment period.”
He added that a recent decline in the pace of the correction is a good sign.
Asked about the coordination of fiscal and monetary policies to counter inflation, Rhee said he is lucky because Korea’s finance minister agrees that price stability is a priority and the two are in lockstep.
Rhee spoke on the sidelines Group of 20 meetings in India, where participants discussed topics ranging from Russia’s war in Ukraine and global economic growth.
“We are talking about debt restructuring, all these issues,” he said. “That is important, but it’s better to have an end to the war.”
–With assistance from Michelle Jamrisko and Sangmi Cha.
(Adds more comments from Rhee)
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