"Inflation Pressure Intensifies with Exchange Rate Contributing About 9% to Price Increase in Q1"
The Bank of Korea Announces Monetary and Credit Policy Report
[Asia Economy Reporter Seo So-jeong] Since the Ukraine crisis, the speed of the KRW-USD exchange rate increase has been the fastest since the global financial crisis, and the contribution of the exchange rate to inflation in the first quarter of this year was analyzed to be about 9% of the consumer price inflation rate (3.8%). As the long-term upward trend of the exchange rate continues, concerns are growing that domestic inflationary pressures may be further intensified.
The Bank of Korea stated in the Monetary and Credit Policy Report released on the 9th that the contribution of the exchange rate to inflation, calculated using the estimated pass-through rate of the exchange rate to prices, appeared as such.
According to the Bank of Korea, since the Ukraine crisis this year (February 25 to May 20), the speed of the exchange rate increase was 1.15 KRW per day on average, showing the fastest rise among the upward phases since the global financial crisis.
The pass-through rate of the exchange rate to prices had been gradually decreasing since the global financial crisis and fell to nearly zero in 2020, but it has risen again and is estimated to be about 0.06 as of the first quarter of this year. The pass-through rate of the exchange rate to prices means the change in the inflation rate when the KRW-USD exchange rate or the nominal effective exchange rate changes by 1%.
The Bank of Korea judged that the rise in the pass-through rate of the exchange rate to prices was due to increased incentives for companies to pass on prices compared to the low inflation period in the mid to late 2010s, caused by global supply bottlenecks during the COVID-19 crisis recovery process and the overall expansion of inflationary trends.
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The Bank of Korea said, "While the pass-through rate of the exchange rate to prices has been rising recently, unlike past upward phases, both demand and supply factors are acting as inflationary pressures," and added, "It is necessary to pay closer attention to the impact of future exchange rate increases on domestic inflationary pressures."
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