'Jackson Hole Aftershock' Hits Korean Financial Market

US Powell Chair's Hawkish Remarks Tsunami
Exchange Rate Surges Past 1350 Won Intraday...New High
KOSPI & KOSDAQ Plunge...Spreading Anxiety
Import-Dependent Korea Faces Inflation Concerns
Side Effects of Interest Rate Hikes Inevitable

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), is speaking at a press conference held in Washington DC on the 27th (local time). He hinted at the possibility of taking a "Giant Step" (a 0.75 percentage point interest rate hike at once) in September. [Image source=Yonhap News]

As feared, the hawkish (preference for monetary tightening) remarks made by Jerome Powell, Chair of the Federal Reserve (Fed), at the Jackson Hole meeting had a strong impact. Accelerating the preference for the dollar, the won-dollar exchange rate rapidly surged past 1,350 won on the 29th, while the KOSPI and KOSDAQ indices sharply declined. If the Fed's tightening accelerates as Chair Powell predicted, it is expected that the domestic economic recession will also accelerate due to slowed consumption and investment and increased uncertainty.

According to the Seoul foreign exchange market, the won-dollar exchange rate started the day at 1,342.5 won, up 11.2 won from the previous trading day, and soared to the 1,350 won level during the session. The exchange rate had been on a high rise, breaking through the 1,340 won level for the first time in 13 years and 4 months last week, then slightly declined due to weak economic indicators from the U.S. and Europe, but surged again after the Jackson Hole meeting as the strong dollar phenomenon intensified. With the strengthening dollar and increased risk-averse sentiment, the KOSPI and KOSDAQ indices fell by over 2% and 3%, respectively, on the day.

When the exchange rate rises, the prices of imported goods into Korea increase, which is critical for domestic inflation. According to a report titled “Characteristics and Implications of Inflation in Korea” released by the Korea Institute for Industrial Economics and Trade the day before, as of June, the domestic import price inflation rate exceeded 33%, and more than one-third of the import price increase in the first half of this year was due to the exchange rate. Given Korea’s economic structure with high dependence on imported energy such as crude oil and gas, a further decline in the won’s value will inevitably exacerbate price instability.

If the Fed raises interest rates sharply, the Bank of Korea will also have no choice but to raise rates, leading to side effects such as increased interest burdens on citizens, reduced consumption, decreased investment, and capital outflows. Although Lee Chang-yong, Governor of the Bank of Korea, who attended the Jackson Hole meeting, evaluated in a media interview that Chair Powell’s remarks were “generally in line with expectations,” he acknowledged that the U.S. rate hikes worsen Korea’s inflation concerns, making it highly likely that the rate hike trend will continue at least until the end of the year. Korea is already in a situation where the annual interest cost per person has increased by at least 1.3 million won due to the base rate hikes since August last year, so the pain for borrowers from additional rate hikes is expected to grow.

Concerns about a domestic economic recession are also expected to spread. Ahn Young-jin, a researcher at SK Securities, said, “It has been reaffirmed that interest rates need to be raised further to curb inflation, and the economy must endure the resulting contraction.” Lee Sang-ho, head of the economic research team at the Korea Economic Research Institute, said, “Our current financial defense capacity is quite vulnerable. If interest rates rise further amid shrinking household consumption capacity and bursting asset value bubbles, the economic impact will be significant.”

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