Seoul: The Bank of Korea should keep its policy focus on fighting inflation and be ready to help stabilize markets, Governor Rhee Chang-yong said in a New Year speech.
Inflation is the most important factor for people’s livelihoods and is expected to remain elevated, Rhee said, according to a transcript of his remarks released by the BOK. The central bank should also monitor financial and foreign exchange markets and take proactive action if needed to maintain stability, he said.
Inflation remained more than double the BOK’s target of 2 per cent as of December, keeping pressure on Rhee and his seven-member board to stay on a path to higher interest rates. A continued series of hikes by the Federal Reserve also reinforces the need for the South Korean central bank to keep tightening as it remains wary of widening rate differentials with the US.
Overview of the economy
With an economy heavily reliant on trade, Korea needs to prevent its currency from swinging sharply. The depreciation was among key reasons the BOK cited when it raised its key rate by a half-percentage point in October, just the second outsized hike in the bank’s history.
The BOK returned to a gradual pace of tightening in November when it lifted borrowing costs by a quarter-percentage point to 3.25 per cent. It next meets on January 13 for a rate decision that may be the last hike of the cycle.
Among other factors being watched by the BOK are Korea’s weakening exports and credit-market volatility that spiked after the default of a Legoland developer and continues to overshadow the property market as housing prices fall.
There’s potential for financial market instability to rekindle as the real estate market cools rapidly, but policymakers should be able to overcome it with the right mix of measures, Rhee said.
Forecast
Demands for higher wages among workers, including truckers handling Korea’s logistics, are another concern for the BOK as it remains cautious of a potential price-wage spiral.
Consumption is also showing signs of softening in response to higher borrowing costs, while industrial production is weakening.
“The risks of a hard landing have been growing,” Citigroup Inc. analysts Kim Jin-wook and Choi Jiuk wrote in a note on December 8. They also forecast a looming housing-market correction would hurt economic growth this year.
Economic growth is likely to slow to 1.7 per cent in 2023, the BOK said in its November forecasts. Rhee has dismissed any speculation of a pivot to policy easing this year as premature as he looks to keep the focus on fighting inflation.
