"Won-Dollar Exchange Rate Rise, Consumer Prices Up 0.4%P in H1... Background of Big Step"

Bank of Korea, Monetary and Credit Policy Report

On the 7th, when the won-dollar exchange rate surpassed 1,380 won for the first time in 13 years and 5 months, dealers were working in the dealing room of Hana Bank in Euljiro, Seoul. Photo by Moon Honam munonam@

[Asia Economy Reporter Seo So-jeong] The rise in the won-dollar exchange rate is estimated to have pushed up consumer prices by about 0.4 percentage points in the first half of this year.

The Bank of Korea stated this in its Monetary and Credit Policy Report released on the 8th, citing the need to strengthen inflation response and the additional inflationary pressure caused by the exchange rate increase as the background for the "big step rate hikes by the central banks of Korea and major countries."

The big step rate hikes (a 0.50 percentage point increase in the base interest rate) by major countries are the first in over 20 years since the 2000s, and the Bank of Korea's 0.50 percentage point base rate hike in July was the first of its kind.

The report explained that the primary consideration behind the big step rate hike decisions by the Bank of Korea and major central banks was the need to strengthen their response to high inflation. In Korea's case, concerns over inflation increased as the consumer price inflation rate rose to the 6% range in June. Notably, it took seven months for the inflation rate to rise from the 3% range to the 5% range, but only one month to jump from the 5% range to the 6% range, indicating a sharp acceleration.

Concerns also grew as inflationary pressures expanded widely, with the proportion of items with inflation rates exceeding 5% reaching 50%, driven not only by supply factors but also by increased demand pressures. Accordingly, the report noted that if the interaction between prices and wages strengthens and high inflation becomes entrenched, a stronger monetary policy response will be necessary. Therefore, the big step rate hike was implemented to proactively curb the spread of inflation expectations through faster and larger interest rate increases.

Another background for the big step rate hikes was the additional inflationary pressure caused by exchange rate increases in countries other than the United States, as the U.S. Federal Reserve (Fed) accelerated its rate hikes. With major currencies depreciating sharply against the U.S. dollar this year, the impact of rising international commodity prices on each country's inflation has increased. Countries such as New Zealand, Norway, and Switzerland cited rising import prices due to their currency depreciation as one of the reasons for their big step rate hikes.

The report added, "Expectations of won depreciation increase pressure for foreign investor capital outflows, which in turn act as additional factors for further won depreciation." It also stated, "The Bank of Korea's big step decision acknowledges that short-term growth losses are inevitable in the process of responding to high inflation, but based on past experience, stabilizing prices quickly is judged to bring greater long-term benefits in terms of growth."

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