Korea faces growing threat of inflation throughout 2022: BOK chief

Bank of Korea Governor Lee Ju-yeol speaks during an online press conference at its headquarters in Seoul, Thursday. Courtesy of Bank of Korea

By Lee Min-hyung

• Published Dec 16, 2021 4:56 PM KST
• Updated Dec 16, 2021 5:00 PM KST

Currency swap deal between Korea, US will expire on Dec. 31

By Lee Min-hyung

The Korean economy will keep grappling with “persistent” inflationary fears throughout 2022 due to prolonged global supply bottlenecks and demand-pull pressure on prices amid the expected economic recovery from the pandemic, Bank of Korea (BOK) Governor Lee Ju-yeol said Thursday.

“The central bank forecasts consumer inflation to reach the 2-percent range next year, as demand-pull inflationary pressure will expand on growing signs of economic recovery,” Lee told reporters during a year-end press conference.

Lee left open the possibility for additional rate hikes next year to control the pressure, after having done so in August and November. This possibility is in line with the hawkish outcome of the U.S. Federal Open Market Committee (FOMC) meeting, during which the Federal Reserve sent clear market signals that it will put an end to its yearslong, near-zero rate policy, increasing it three times in 2022 alone.

But Lee declined to comment on when exactly it would do so. The general consensus is that the BOK will increase the benchmark rate by 25 basis points to 1.25 percent in January or February.

“We will maintain our stance on normalizing the monetary policy, and adjust the pace after taking comprehensive factors into account ― such as risks on prices, financial imbalance and growth,” he said.

On the same day, the BOK also said that its currency swap agreement worth $60 billion (71 trillion won) with the U.S. Fed will expire as of the end of 2021.

Korea's central bank, however, dispelled concerns over the possible aftermath of its expiration, saying the nation's financial and economic conditions have entered a path for stable recovery from the pandemic shock.

The two countries signed the deal in March 2020 amid escalating fears over the outbreak of the COVID-19 pandemic. This agreement has since been extended twice until Dec. 31 of this year.

Given the central bank's strengthened capabilities in responding to possible risks from foreign currency liquidity, the expiration of the agreement will have a limited impact on Korea's foreign exchange market, the BOK said.

It added that there has been no demand to expand dollar liquidity here since July 2020.

“The situation has changed a lot since both countries signed the agreement early last year, and we have not felt the necessity to spend the swap fund for more than 18 months,” Lee said. “The BOK and the Fed shared the common ground on this.”

The won-dollar exchange rate inched down on Thursday, as the result of the FOMC meeting was somewhat less hawkish than the market expected. The exchange rate closed at 1,183.9 won, down 1.3 won from the previous trading day.

The stock market saw little effects from the FOMC meeting. The benchmark KOPSI closed at 3,006.41, up 17.02 points from a day earlier, as investors regained confidence on risky assets, after uncertainties surrounding the tapering and U.S. rate hikes were cleared away to some extent. The secondary KOSDAQ also closed with a slight gain of 0.43 percent Thursday from a day ago, according to the Korea Exchange.

Local economists also expected the Fed to start its first key rate hike sometime in the second quarter of 2022, and to do so twice more by the end of next year, which will push the BOK to carry out more aggressive rate hikes next year.

“Powell mentioned the risk that inflation may be persistent, and the Fed revised up its inflation outlook in 2022 and 2023, so our expectation is that the U.S. will bring forward the timeline for its benchmark rate hike,” Daishin Securities economist Kong Dong-rak said.