BOK's months-long rate freeze tested by weakening won
Electronic signboards at a Hana Bank dealing room in Seoul show the benchmark KOSPI fell 0.61 percent to 2,504.5 points, while the Korean currency strengthened by 3.7 won to close at 1,338.3 won per dollar, Friday. Yonhap
Central bank holds monetary policy meeting next Thursday
By Yi Whan-woo
The weakening of the Korean won against the U.S. dollar this month has raised questions over whether the Bank of Korea (BOK) should consider resuming rate hikes after keeping the base rate steady since January.
Analysts said Friday that the BOK is likely to freeze the rate, currently at 3.5 percent, at its upcoming monetary policy board meeting next Thursday.
They noted that the latest volatility in the won-dollar exchange rate is mainly driven by concerns over China's deflation and other signs of an economic downturn, which they assessed do not seriously dent Korea's currency and stock markets at the moment.
But they also said resuming a rate hike may be necessary, if the faltering Chinese economy adds inflationary pressure on the world, especially the United States, and in turn pushes prices up in Seoul and rattles its financial markets.
The BOK's months-long rate pause was attributed to softened inflation in Korea, which fell to a 14 month-low of 3.3 percent in July.
“I don't' think the BOK will end its rate freeze just because the currency rate in Seoul is affected by the Chinese economy,” said Joo Won, deputy director of the Hyundai Research Institute. “But the central bank may need to revise such a policy if the Chinese economy gets worse and disrupts the supply of goods worldwide to result in the price hikes of goods.”
His comments came after the Korean currency, which hovered around the 1,200 won level against the greenback in the past months, weakened to the 1,330 level or lower this week.
In particular, the value of the local currency retreated to an annual low of 1,343 won several times during the trading hours this week, although it managed to recover at each session's close.
It closed at 1,338.3 won per dollar, Friday, strengthening by 3.7 won from a day earlier.
With the weakening of the won, foreign investors dumped more than 1 trillion won ($747.6 million) worth of Korean stocks during the first 17 days of August after buying more than 800 billion won worth of shares in July.
The offloading of stocks comes as investors search for safe haven assets, as the Korea-U.S. interest rate gap widened to all-time high of 2 percent.
The U.S. rate stands between 5.25 percent and 5.5 percent compared to Korea's 3.5 percent.
Seo Jung-hoon, a Hana Bank economist, said, “Foreigners offloading stocks here can be worrisome.”
However, he noted that foreign investors have sold more shares during the same time period before and that “it will not be a reason for a possible end to the BOK's rate pause.”
Concerning the negative impact of the Chinese economy on the U.S., Seo pointed out that the benchmark 10-year U.S. treasury yield hit a 10-month high of 4.312 percent, Thursday, as investors grappled with the potential of persisting high interest rates and a struggling Chinese economy.
Seo also pointed out that the Fed leaves room for an additional rate hike as inflation climbed to 3.2 percent in July following 3 percent in June, which marked the slowest pace since March of 2021.