The Bank of Korea, the first major Asian central bank to move away from the crisis last August, has faced a narrowing of interest rate gaps from the United States. If domestic rates tend to be lower than US rates, the outflow of capital may put additional pressure on the currency.
Investment banks and economists are beginning to change their minds about how quickly BOK will raise rates, with some predicting that the key rate will reach 2.50% by the end of the year against 1.50% now.
Governor Ri Chang-Yong, who is considered a smaller hawk than his predecessor, will chair his first political meeting this month, as factors such as the Russian-Ukrainian war make it difficult to predict when inflation will eventually decline.
“Inflation is several times higher than expected, which means that South Korea’s political rate has actually fallen in real terms, despite the recent increase,” said Seok Gil Park, an economist at JPMorgan Chase Bank. The bank raised its forecast rate to 2.50% by the end of the year from 2.00% earlier.
It has fallen by almost 7% since the beginning of the year to about 1273 per dollar after losing almost 9% last year. It seems that for the first time since the global financial crisis of 2008/09, it will overcome a psychologically significant barrier of 1,300 won.
Gains weakened due to the sale of domestic shares abroad and deteriorating trade balance, among other factors that are dangerous for inflation. South Korea is heavily dependent on imports of energy, food and industrial components.
According to official figures, import prices, expressed in won, have risen by at least 30% a year over the past six months, helping to boost consumer price inflation to its highest level since more than a decade in April, down from less than in April. 2.5% six months earlier.
In addition to inflation, central bankers must also worry about the risk of capital outflows.
Key rates in the US and South Korea
PROCUPATIONS REGARDING THE DISTINCTIVE DIFFERENCE BETWEEN
The surcharge on South Korea’s political rate above the midpoint of US federal funds fell to 62.5 basis points from 112.5 points at the end of January.
According to a Reuters poll, the average point of the US target range is expected to reach 2.125% by the end of the year, and the base rate BOK – 2.00%.
“Politicians are closely monitoring the situation in terms of financial stability, in terms of capital flows,” said Chong Son Tai, a senior economist at Samsung Securities, noting that he had fallen despite repeated interference.
Both the BC and the Fed will meet five times over the rest of the year, but the latter is expected to raise the key rate more than the former.
Falling has often caused health concerns among investors about Asia’s fourth-largest economy, which went bankrupt in the late 1990s and suffered an outflow of capital in 2008-09.
The minutes of the BOK meeting of 14 April showed that a small majority of the members of the board called for vigilance regarding the reduction of foreign currency and the risk of outflow of foreign capital.
The South Korean won is weakening
South Korea has said its economic fundamentals have improved significantly in recent years, but former Bank of Korea Chairman Kim Chung-soo told Reuters that capital flows remain a serious problem for officials.
The last 11 quarters in South Korea’s two main stock markets saw net sales of foreign capital in all but two, with net sales of 63.05 trillion won ($ 49.5 billion) in those 11 quarters. Foreign investors are also selling this quarter.
“Can a credit difference in itself cause an outflow of capital? Yes, and so we must be very careful with the (negative) credit gap that is developing,” said Kim, who was governor from 2010 to 2014.
(1 dollar = 1274.0100 won)