SEOUL– South Korea’s consumer prices are likely to peak in October, but they may stabilize at a slow pace due to the local currency’s sharp weakness against the U.S. dollar, the chief of the central bank said Monday.
The Bank of Korea (BOK) is also exchanging information on dollar liquidity conditions with the U.S. Federal Reserve amid market expectations of the possible opening of a currency swap line between the two central banks, BOK Gov. Rhee Chang-yong told a parliamentary committee meeting.
The BOK chief said consumer inflation is expected to stay in the 5-6 percent for a considerable period of time, stressing the need to prioritize keeping price stability.
“The impact of the won’s sharp weakness on inflation has offset that of falling oil prices. Inflation is likely to peak in October, but what’s more worrisome is that the falling pace of consumer prices is likely to be very slow,” Rhee said.
He said the Fed’s latest decision to raise its policy rate by 75 basis points for a third time has changed the preconditions for the BOK’s incremental rate hike, hinting at the possibility of another 50 basis point increase in the coming months.
Last month, the BOK raised the key interest rate by 0.25 percentage point to 2.5 percent. The decision followed its first-ever “big-step” rate hike of 50 basis points in July and marked the seventh rate increase since August last year.
South Korea’s consumer prices grew at a slower pace in August after running at a 24-year high the previous month as global oil prices retreated. But the country still faces high inflationary pressure due largely to an increase in energy and food prices.
Consumer prices, a key gauge of inflation, jumped 5.7 percent on-year last month, slowing from a 6.3 percent surge in July.
The won’s sharp weakness is feared to further add upward pressure on consumer inflation.
The Korean currency on Monday fell below the 1,420 won mark against the U.S. dollar for the first time in more than 13 years during intraday trading amid global tightening. The won has depreciated around 17 percent per dollar so far this year.
Touching on the currency swap line, Rhee said the Fed has internally set conditions under which it could open a swap facility with other central banks.
“Theoretically speaking, we are not in a situation where a currency swap line is needed. But as people feel jittery about (the foreign exchange market situations), it would be good to open the swap line (with the Fed),” Rhee said.
“But when conditions for swap deals are not met, if we ask for a swap facility as if there is a problem in our country, there could be side effects,” he said.
Rhee said Asia’s fourth-largest economy is expected to see slowing growth momentum until next year due to heightened external uncertainty.
The country suffered a trade deficit for the fifth straight month in August due to high energy costs, but the nation is expected to continue to post a current account surplus this and next year, he noted.
A trade deficit is feared to put downward pressure on the Korean won as it means fewer dollars in the market.
Source: Yonhap News Agency