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[Editorial] More risks for economy

High inflation, depreciation of Korean won call for prudence from BOK policymakers

Russia’s invasion of Ukraine, which exacerbates already troubled global supply chains, is not the only headache for the Korean economy to tackle. There is a growing list of risk factors, some of which warrant a careful analysis and, if necessary, decisive action.

As with other parts of the world including the United States and Europe, inflation is posing the most immediate and insidious threat. As if the war in Ukraine isn’t bad enough, Indonesia’s surprise palm oil export ban is forcing Korea’s small restaurant and food delivery operators to find alternatives, or swallow sharply decreased profits -- or even losses.

Prices are racing to go up for other items, ranging from energy prices to consumer goods based largely on imports. Korea’s consumer prices grew 4.1 percent in March from a year ago, the fastest on-year gain in more than 10 years due to higher commodity prices.

Fast-rising consumer prices, spurred by higher prices of raw materials and shortage of components imported from other countries, are eroding consumers’ purchasing power, which in turn could dampen domestic consumption and cloud the growth outlook going forward.

No wonder, then, that Gov. Rhee Chang-yong, the new Bank of Korea chief, said Monday that he is more concerned about inflation than economic growth. Rhee’s stance at his first press briefing since he took office marks a change in tone from his earlier focus on growth over inflation.

Rhee’s remark came after the International Monetary Fund raised its inflation projection for Korea to 4 percent from 3.1 percent, and lowered its 2022 growth outlook to 2.5 percent from an earlier projection of 3 percent.

The central bank also projected that high inflation at this pace would push up wages for Korean workers, adding to more upward pressure on prices in a vicious cycle.

However, Rhee did not send a clear sign for a further interest rate hike in May, saying that the BOK will closely watch the US Federal Reserve’s forthcoming rate decision. Fed Chair Jerome Powell said on Thursday that a rate hike of half a percentage point “will be on the table for the May meeting,” suggesting that he is keen to rein in high inflation at a faster clip and cool down the overheating US economy.

But it is unlikely that the BOK will take its cue from the Fed by raising the benchmark rate dramatically in the coming months. The central bank already hiked its policy rate by a quarter percentage point in mid-April. It was the fourth rate increase since August last year.

Rhee said the central bank will monitor the financial market to see whether the Fed’s brisk rate hikes, including an imminent “big step,” could touch off capital outflow coupled with the weakening Korean won against the US dollar. He downplayed the risk of a weaker local currency, arguing the won’s depreciation has not been as serious as that of the euro and other currencies.

But it remains to be seen whether the Korean won will sustain its value even if foreign investors dump Korean stocks and head for the US to seek higher interest income. The Korean won has depreciated 12.7 percent against the dollar from a year earlier.

In all fairness, Korea is in a relatively better position than Japan in terms of the exchange rate, given that the Japanese yen has dropped to a 20-year low against the dollar.

But there is no room for complacency, as the continued weakening of the Korean won will push up prices. Growth data is not pretty, either. The country’s gross domestic product grew 0.7 percent in the first quarter this year, decelerating from a 1.2 percent increase in the fourth quarter of 2021, the data from the BOK showed Tuesday. The country is urged to take proactive measures including the currency swap deal with the US without delay.

By Korea Herald (khnews@heraldcorp.com)
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