Lee Chang-yong "Exchange Rate Rise Acts as Upward Pressure on Prices... Signs of Current Account Improvement in September"

Attendance at the National Assembly Planning and Finance Committee Plenary Meeting

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jung] The Bank of Korea announced that it will carefully examine the impact on domestic inflation, growth trends, and financial and foreign exchange markets as it determines its monetary policy.

Lee Chang-yong, Governor of the Bank of Korea, appeared before the National Assembly's Planning and Finance Committee plenary session on the 26th and stated, "In a situation where a high inflationary trend is expected to continue for a considerable period, we need to be cautious about the possibility that the rise in the won-dollar exchange rate could act as an additional upward pressure on domestic prices through increased import prices."

In his opening remarks that day, Governor Lee predicted, "Major central banks have raised policy interest rates more sharply than initially expected in response to high inflation, and they are expected to maintain a high degree of tightening for a considerable period going forward."

In particular, the U.S. Federal Reserve (Fed) reiterated its commitment to price stability at last week's Federal Open Market Committee (FOMC) meeting, raising the policy interest rate by 0.75 percentage points for three consecutive times in June, July, and August. The forecast for the final policy rate was also significantly raised from around 4% to a higher level. As interest rate hikes accelerate in major countries, concerns about global economic slowdown have become more pronounced. In international financial markets, the U.S. dollar has strengthened further, major countries' government bond yields have risen rapidly, and stock prices have fallen significantly.

Governor Lee said, "Volatility in key price variables has expanded in domestic financial and foreign exchange markets as well," adding, "The won-dollar exchange rate, which had been rising due to the global dollar strength, surged sharply above 1,400 won recently, influenced by the weakening of the yuan and yen since August and the shock from last week's FOMC meeting results."

Regarding future monetary policy, Governor Lee stated, "We will pay close attention to the possibility of increased risks in domestic growth, finance, real estate, and foreign exchange sectors depending on the tightening intensity of major central banks and the development of external conditions such as the Ukraine situation. However, as there needs to be sufficient discussion with the Monetary Policy Committee regarding the specific magnitude, timing, and path of interest rate hikes, I ask for your understanding that I cannot comment on these details at this time."

Furthermore, Governor Lee assessed that although the won-dollar exchange rate has risen sharply recently, this was mainly influenced by external factors and, unlike past crises, is not currently due to issues with the soundness of Korea's external sector.

He explained, "Despite the sharp rise in the won-dollar exchange rate, the depreciation of the real effective exchange rate, which considers inflation and trade weights, has not been significant and has not deviated greatly from the average level even over a long period." He added, "With high external credibility maintained, foreign currency funding conditions remain favorable." Korea is a net creditor country, with external claims significantly exceeding external liabilities, and considering its foreign exchange reserves ranked ninth globally, its capacity to respond in emergencies is not lacking.

Governor Lee said, "Some have raised concerns about a current account deficit possibility in August, but signs of improvement have appeared since September, and an annual surplus trend is expected to continue." He emphasized, "The Bank of Korea will maintain heightened vigilance to prevent excessive concerns about external soundness from leading to market instability and will strive to stabilize financial and foreign exchange markets."

While faithfully fulfilling its primary roles of price stability and financial stability, the Bank of Korea will promptly implement market stabilization measures according to a prepared Contingency Plan if excessive concentration in the foreign exchange market causes the won-dollar exchange rate to deviate excessively from Korea's economic fundamentals. Various micro-level countermeasures to alleviate foreign exchange supply-demand imbalances, such as the recently announced swap agreement with the National Pension Service, will also be actively pursued in cooperation with the government.

Governor Lee said, "Last week, the Bank of Korea decided to strengthen policy coordination with the government and supervisory authorities, maintaining a 'broader and longer-term perspective' to effectively respond to prolonged high external uncertainties." He added, "We will work with the government to prepare support measures for vulnerable sectors that may face increased difficulties during the interest rate hike process and seek the optimal policy mix to wisely overcome the challenges facing our economy."

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