The Won-Dollar Exchange Rate Hits an Intraday High of 1194.8 Won

Tapering and Household Debt Variables Everywhere... Possibility of Increased Financial Volatility
12th FOMC Likely to Keep Rates Steady

[Asia Economy Reporter Jang Sehee] The Monetary Policy Committee of the Bank of Korea, which decides the base interest rate, has only two meetings left this year. At the upcoming monetary policy direction decision meeting scheduled for the 12th, the focus is expected to be on maintaining the current interest rate, drawing attention to whether an additional rate hike will be implemented within the year in November.

Amid external risks such as the U.S. Federal Reserve's (Fed) tapering (reduction of asset purchases) and the Evergrande crisis, attention is being paid to the actual increase in volatility in the financial markets. On the domestic front, the effectiveness of measures to manage the rapidly increasing household debt must also be monitored.

First, the foreign exchange market has been fluctuating daily. Although the risk of a U.S. default was temporarily resolved following news that the U.S. Congress agreed to temporarily raise the debt ceiling, uncertainty remains. As of 9:23 a.m. on that day, the won-dollar exchange rate recorded 1,194.8 won, setting a new intraday high. This is the highest level in about 1 year and 2 months since August 4 last year (1,195.0 won). A Bank of Korea official stated, "Uncertainty factors in the international financial market continue to have an impact," adding, "There also appears to be some foreign exchange demand from foreigners selling stocks."

As exchange rate volatility expands, the possibility that reaching the 1,200 won level in the future will influence the direction of interest rates is increasing.

Measures to manage household debt are expected to be announced in mid-October, and the tapering roadmap is expected to be revealed at the Federal Open Market Committee (FOMC) meeting on November 2-3.

Professor Kim Sangbong of Hansung University’s Department of Economics said on the 8th, "The market is likely to react depending on how the Fed comments on the base interest rate when announcing tapering," adding, "Attention will be more focused on the Monetary Policy Committee meeting next month rather than this month." Kwon Dohyun, a researcher at the International Finance Center, also said, "If the tapering plan is concretized in November, there is a high possibility of implementation at the end of this year or early next year, so it is necessary to monitor whether volatility in the domestic financial market expands immediately after the announcement." This means that as major events increase market volatility, the variables influencing interest rate decisions also increase.

In fact, recent events such as the Fed’s tapering, the Evergrande crisis, and shifts in major countries’ monetary policy stances have temporarily increased market volatility. The KOSPI fell below the 3,000 mark for the first time in about six months on the 5th, showing increased volatility in the stock market as well.

Experts seem to place more weight on the possibility of a rate hike in November. Although the possibility of an economic slowdown is emerging, considering that the consumer price inflation rate has remained in the 2% range for six consecutive months, indicating rising inflationary pressure, a rate hike in November after holding steady in October cannot be ruled out. The government also expects the consumer price inflation rate in October to be higher than that in September (2.5%). Professor Sung Taeyoon of Yonsei University’s Department of Economics emphasized, "Even looking only at inflation factors, a rate hike is necessary," adding, "At the beginning of the year, the increase was limited to food prices, but recently prices have risen across the board, so some liquidity withdrawal seems necessary."

This content was produced with the assistance of AI translation services.