Exclusive-Bank of Korea’s Rhee says policy tightening unlikely to end before Fed

By Howard Schneider, Ann Saphir and Cynthia Kim

JACKSON HOLE, Wyo./SEOUL (Reuters) -The Financial institution of Korea (BOK) should preserve elevating rates of interest till the speed of inflation is in decline, however the central financial institution seemingly couldn’t halt its tightening earlier than the U.S. Federal Reserve, Governor Rhee Chang-yong stated on Saturday.

In an interview with Reuters, Rhee additionally stated South Korea’s central financial institution is able to take steps, together with intervention to stabilize the gained in opposition to the greenback, if wanted, ought to the financial institution decide speculative forces are inflicting the foreign money’s fall.

Rhee’s feedback, on the sidelines of the Jackson Gap convention of central bankers within the U.S. state of Wyoming, dampened hypothesis that the BOK could be one of many first huge central banks to ease off within the world battle in opposition to the steepest inflation in many years.

Asia’s fourth-largest financial system has been within the vanguard of worldwide tightening. The BOK was among the many first central banks to desert pandemic-era financial stimulus, elevating its key coverage charge by 2 share factors since August final yr to 2.5%.

Greenback appreciation pushed by Fed charge will increase has added to inflation in lots of open economies world wide, together with South Korea, as native currencies fall in worth.

“We at the moment are unbiased from authorities, however we aren’t unbiased from the Fed,” Rhee stated. “So if the Fed continues to extend the rate of interest, it can have a depreciation stress for our foreign money.”

Though the BOK started elevating rates of interest earlier than the Fed, with its first hike a yr in the past, “whether or not we are able to finish earlier – I don’t suppose so.”

South Korea’s inflation is essentially the results of exterior points resembling power costs, Rhee stated.

“In case you ask me, whether or not I’ll cease … what occurs if the oil worth will increase once more?” he stated. “It’s totally exhausting for us to know the precise timing, given the significance of the exterior shock.”

Despite the fact that he expects home inflation to sluggish in August in contrast with the 6.3% charge seen in July, it’s “too untimely” to say it has peaked, particularly since, as winter approaches, gasoline costs may once more rise.

The BOK raised charges by 1 / 4 level at its final assembly and stated additional quarter-point will increase “will probably be acceptable for a while so long as inflation paths stay as presently presumed.”

At this level, “I can’t say we’re forward of the curve,” Rhee stated. “So long as inflation stays excessive, which means 4%-5% … then we will certainly proceed to emphasise the normalization” of rates of interest.

EYE ON THE WON

Inflation in South Korea is forecast round 5% by the tip of 2022, and to fall by means of 2023. Its central financial institution, like many others, targets 2% inflation.

At Jackson Gap, central bankers used largely the identical language to explain their battle in opposition to rising costs. Although the headline downside is similar – inflation far above their established targets – the sources of worth stress and subsequently the coverage responses differ amongst nations.

For smaller, open economies like South Korea’s, the scenario is especially complicated due to the spillover results from insurance policies set elsewhere.

Federal Reserve Chairman Jerome Powell on Friday kicked off the Jackson Gap convention by saying the Fed will elevate charges as excessive as wanted to limit progress, and would preserve them there “for a while” to carry down inflation.

His speech sparked a sell-off in U.S. fairness markets, and Rhee stated on Monday consideration would flip to the gained.

The gained, considered one of Asia’s worst-performing currencies, has dropped about 11% in opposition to the greenback this yr, and native officers have stepped up surveillance of the foreign money’s actions.

Rhee stated thus far he didn’t see the depreciation as pushed by hypothesis or South Korea’s financial fundamentals, however as a part of the greenback’s rising world energy.

“There are a number of days we see motion that is too extreme – however thus far I feel our change charge motion could be very a lot according to main currencies,” Rhee stated.

However ought to the BOK detect speculative strikes in dollar-won buying and selling, he stands able to intervene in foreign money markets. The gained has been falling sooner than currencies in neighboring China and Japan, partly as a result of they preserve unfastened financial insurance policies, he stated.

Policymakers from President Yoon Suk-yeol to Finance Minister Choo Kyung-ho have stepped up their rhetoric to attempt to sluggish the gained’s decline repeatedly during the last week.

Prime Minister Han Duck-soo stated on Sunday the gained’s weak point ought to assist South Korea’s financial system, in features of exports and the present account, including that he hopes financial coverage might not must be tightened by as a lot or as shortly as in the US.

“This depreciation stress because of the greenback energy really is a foul issue for our inflation, as a result of our imported costs enhance so much,” Rhee stated. However “the present depreciation stress doesn’t imply any liquidity issues or solvency issues, or credit score downside for Korea.”

(Reporting by Howard Schneider and Ann Saphir in Jackson Gap, and Cynthia Kim in Seoul; Further reporting by Jihoon Lee; Modifying by William Mallard and Christopher Cushing)