BOK governor: South Korea must keep interest rates up to fight inflation

SEOUL: The Bank of Korea (BOK) must keep raising interest rates until inflation is in decline, but the central bank likely could not halt its tightening before the US Federal Reserve (Fed), says governor Rhee Changyong.

In an interview with Reuters, Rhee also said South Korea’s central bank is ready to take steps including intervention to stabilise the won against the dollar, if needed, should the bank determine speculative forces are causing the currency’s fall.

Rhee’s comments, on the sidelines of the Jackson Hole conference of central bankers in the US state of Wyoming, appeared to quash speculation that the BOK might be one of the first big central banks to ease off in the global battle against the hottest inflation in decades.

Asia’s fourth-largest economy has been in the vanguard of global tightening. The BOK was among the first central banks to abandon pandemic-era monetary stimulus, raising its key policy rate by two percentage points since August last year to 2.5% .

Dollar appreciation, driven by Fed rate increases, has added to inflation in many open economies around the world, including South Korea, as the local currency falls in value.

“We are now independent from government, but we are not independent from the Fed,” Rhee said.

“So if the Fed continues to increase the interest rate, it will have a depreciation pressure for our currency. Although the BOK began raising interest rates before the Fed, with its first hike coming a year ago, whether we can end earlier – I don’t think so.”

South Korea’s inflation is largely the result of outside issues like energy prices, Rhee said.

“If you ask me, whether I’m going to stop, what happens if the oil price increases again?” he said.

“It’s very hard for us to know the exact timing, given the importance of the external shock.”

Even though he expects domestic inflation to cool in August compared with the 6.3% rate seen in July, it is “too premature” to say it has peaked, especially since, as winter approaches, gas prices could again rise.

The BOK raised rates by a quarter point at its last meeting and said further quarter-point increases “will be appropriate for some time as long as inflation paths remain as currently presumed.”

The stopping point, Rhee said, would hinge on how inflation behaves.

At this point, “I cannot say we are ahead of the curve,” Rhee said.

“As long as inflation remains high, meaning 4% to 5%, then we will definitely continue to emphasise the normalisation” of interest rates.

Inflation in South Korea is forecast around 5% by the end of 2022, and falling through 2023. Its central bank, like many others, targets 2% inflation.

At Jackson Hole, central bankers used largely the same language to describe their battle against rising prices. Though the headline problem is the same – inflation far above their established targets – the sources of price pressure and therefore the policy responses differ among countries.

For smaller, open economies like South Korea’s, the situation is particularly complex because of the spillover effects from policies set elsewhere.

Even the fallout from Fed chair Jerome Powell’s speech last Friday, which sparked a sell-off in US equity markets, would be watched, Rhee said, with an eye on how the won opens today.