Vice Minister of Finance: "Market Stabilization Measures to Be Implemented in Case of Sudden Foreign Exchange Market Imbalance"

Lee Ok-won, First Vice Minister of Strategy and Finance, is presiding over a macroeconomic financial meeting at the Bankers' Hall in Jung-gu, Seoul, on the morning of the 29th. April 29, 2022. Photo by Yonhap News

[Asia Economy Sejong=Reporter Son Seon-hee] Lee Ok-won, First Vice Minister of the Ministry of Economy and Finance, said on the 29th, "The government will closely monitor foreign exchange market trends and maintain the principle of implementing market stabilization measures if sudden market imbalances occur."

Vice Minister Lee made these remarks during a 'Macroeconomic Financial Meeting' held at the Bankers' Hall in Jung-gu, Seoul, on the morning of the same day. This is interpreted as a verbal intervention following the previous day's surge in the won-dollar exchange rate, which surpassed 1,270 won intraday, reaching the highest level in nearly two years.

Vice Minister Lee emphasized, "We will focus our capabilities on proactively checking and blocking risk factors that domestic and international interest rate hikes may bring to the financial market," and added, "We will maintain close cooperation with related agencies and swiftly activate market stabilization measures when necessary."

Concerns have arisen that the recent temporary inversion of yields between the U.S. 10-year and 2-year Treasury bonds, reflecting a global interest rate rise led by short-term bonds, could be a 'precursor to a recession.' Regarding this, Vice Minister Lee stated, "No unusual signs have been observed in the yield spread between the 10-year and 3-month bonds, which have high leading indicators for recessions," and "Considering that the inversion between the 10-year and 2-year yields has recently resolved and the spread is slightly widening, it seems difficult to predict a recession at this point based solely on the temporary inversion."

As the U.S. accelerates interest rate hikes, there are forecasts that the interest rate gap between Korea and the U.S. will narrow, slowing foreign capital inflows. Vice Minister Lee also addressed this by saying, "Foreign capital inflows and outflows are influenced by various factors besides interest rate differentials, such as exchange rate outlook, real economic conditions, and external creditworthiness," and "Considering Korea's differentiated economic fundamentals, solid external creditworthiness, shock absorption capacity, and the fact that foreign capital inflows continued even during past periods of domestic and foreign interest rate inversion, the possibility of a sudden outflow of foreign investment funds under the current circumstances is limited."

However, he warned, "Given the likelihood that the global interest rate rise will continue amid high volatility, we must closely monitor changes in interest rate conditions and their ripple effects on domestic and international financial markets and the real economy."

Meanwhile, Russia, currently at war, is expected to be declared in sovereign default if it fails to repay two government bonds in U.S. dollars by the 4th of next month. The global financial market is on high alert for the repercussions. Vice Minister Lee commented on this, saying, "The direct impact of the (Russian) default on the domestic financial market will be limited." However, he added, "There remains a possibility that the risk could expand to the solvency risk of Russian private sectors such as companies and institutions, or transfer to the real and financial sectors of neighboring or vulnerable countries, adversely affecting global liquidity," and "We will closely monitor related trends and their ripple effects on our economy."

Ahead of the announcement of the 'April Consumer Price Inflation Rate' next week, Vice Minister Lee said, "Due to the prolonged Russia-Ukraine war and rising uncertainties, inflationary pressures are expected to remain high for the time being." In response, the government plans to expand the fuel tax reduction from the existing 20% to 30% for three months starting from the 1st of next month.

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