Post by : Saif
Al-Najjar
The Bank of Korea has issued a warning indicating that if the South Korean won remains weak against the U.S. dollar, inflation could surpass expected levels next year. The central bank noted that maintaining an exchange rate around 1,470 won per dollar could lead to consumer price increases beyond current projections.
In November, the annual headline inflation rate rose to 2.4 percent, exceeding the bank's two percent target for the third consecutive month. A depreciating won tends to inflate prices of imported goods, subsequently raising domestic costs.
Governor Rhee Chang-yong expressed the necessity of safeguarding foreign exchange stability despite significant dollar outflows from South Korea’s $350 billion investment fund, part of its trade arrangement with the United States.
Moreover, Rhee urged the National Pension Service—one of the nation's largest investors—to exercise greater diligence regarding macroeconomic trends, given its dollar acquisitions for foreign investments, which have contributed to the won's weakness. He recommended that currency hedging be employed to preserve the value of these overseas investments.
On Wednesday, the won fell by 0.5 percent to 1,480.4 per dollar, closely approaching its lowest point in 16 years. Economists warn that an extended period of a weak won could inflate costs for goods and services, further straining households and businesses.
The Bank of Korea's analysis emphasizes that monitoring exchange rates and managing large investment flows are pivotal for inflation management. Action may be taken if the unstable won jeopardizes price stability or economic growth.
Maintaining a stable currency is crucial for controlling living expenses and sustaining economic confidence. Coordinated efforts between the central bank and significant investors will be essential for managing these challenges in the upcoming year.
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