Seoul: Bank of Korea (BOK) Governor Rhee Chang-yong has highlighted the significant impact of the current won-dollar exchange rate on inflation and inequality, describing the situation as a crisis in these terms, though not a traditional financial crisis. Rhee's comments were made during a press briefing in Seoul, where he pointed to imbalances in foreign exchange supply and demand as a major factor behind the weak won, urging the National Pension Service (NPS) to consider the macroeconomic effects of its overseas investments.
According to Yonhap News Agency, the local currency has been trading below the critical 1,450 won per dollar level due to substantial overseas investments by local investors and the selling of domestic shares by foreign investors following recent gains. The won was quoted at 1,479.8 per dollar recently, nearing its weakest level since April 2009. Authorities have committed to taking appropriate measures to stabilize the market, including a one-year extension of a foreign currency swap agreement with the NPS.
The BOK has resumed currency swap transactions with the NPS, although details on timing and scale remain undisclosed. The agreement has a ceiling of US$65 billion. Governor Rhee suggested that the NPS should manage its overseas investments with consideration for their macroeconomic spillover effects, advocating for less transparency in the timing of currency hedging.
In collaboration with the finance ministry, the BOK, NPS, and the welfare ministry, a four-party consultative body has been formed to develop a new framework aimed at aligning NPS' investment returns with market stability to mitigate FX market volatility. The BOK emphasized that the pass-through effect of the weak currency on prices could intensify if the exchange rate remains around the current level through next year, with inflation forecasted at 2.1 percent for 2024.
Consumer inflation has already risen, with increases from 2.1 percent in September to 2.4 percent in the following two months, driven by higher prices of agricultural and petroleum products, as well as a surge in service prices due to strong holiday demand. However, core inflation, excluding food and energy prices, is expected to remain stable at around 2 percent in 2026, reflecting a modest economic recovery pace.
The BOK noted that global oil prices are expected to decline temporarily, acting as a downward factor on inflation. While an economic recovery might create some upward pressure on inflation, the overall impact on prices is likely to be limited, as the recovery is primarily driven by the semiconductor and technology sectors.