BOK's monetary easing unlikely to fuel inflation, won's plunge: experts

Bank of Korea Governor Rhee Chang-yong attends a press conference at the bank headquarters in Seoul, Feb.25. Yonhap

The central bank's monetary easing in the coming months will not cause a further plunge of the Korean currency or fuel inflation, economists and analysts said Tuesday.

Advancing the assessment is the downward trend in global commodity prices, a factor for eased inflationary pressures.

Also at play is China, the world's largest energy consumer, facing serious deflationary pressure, stabilizing global commodity prices, including oil to the level in 2020.

“We think stable oil prices will keep a lid on Korea’s import bills and, in turn, inflation,” said Caroline Wong, senior country risk analyst at BMI, a Fitch Solutions affiliate.

Korea’s merchandise import bill tends to be driven by the trajectory of global commodity prices, reflecting the economy’s heavy reliance on imported hydrocarbons, she said.

“Energy and natural resources typically account for 20 percent of the country’s goods shipments. Our oil and gas team’s forecast is for Brent Crude to average 76 dollars per barrel this year, down from 79.8 dollars last year, suggesting that oil prices should not pose a huge concern to the trajectory of headline inflation this year," the analyst added.

Wong then said Korea’s inflation will average 2 percent in 2025, not least due to weak demand-side pressure. “Benign inflation should provide the Bank of Korea (BOK) the space it needs to ease policy.”

 

Meanwhile, the BOK will be in a bind over the pace of monetary easing, complicated by weaker-than-expected Korean currency against the U.S. dollar and Trump tariff threats.

Underpinning the assessment is uncertainty from the second Trump administration, leaving the Korean currency unable to gain ground despite the overall receding strength of the global reserve currency as of late.

“The central bank is grappling over the slower-than-expected pace of monetary easing, and the weak Korean currency is not helping,” an official at the Korea Center for International Finance said.

The unchallenged reign of the U.S. dollar is showing signs of weakness over recession concerns in the world’s largest economy.

The dollar index, a measure of the value of the U.S. dollar against six major currencies including the euro and yen, surged about 6 percent for about two months since Nov. 5 last year, when the U.S. presidential election was held. However, it reversed most of the gains as of Monday.

Most major currencies are recovering as a result.

The European Union currency traded at around 0.92 euros against the U.S. dollar in the first week of March. The Japanese currency traded 147 yen against the global reserve currency, stronger than the pre-U.S. election level of 152 yen.

Its Chinese peer weakened to 7.33 yuan in January but has since gained to 7.25 yuan.

In contrast, the Korean won lost ground by about 80 won per dollar compared to pre-election levels and has yet to significantly recover.

The central bank says the increase of around 20 won is explained by President Yoon Suk Yeol’s botched martial law and the ensuing political turmoil, including impeachment proceedings. Still, the currency depreciation is sharper than other currencies.

 

According to Jang Jae-chul, a former senior economist at KB Securities, the Korean won is not recovering as quickly as other currencies.

“Germany, for example, is seeking to put in place a large-scale stimulus package,” he said. “This, together with the monetary easing by the European Central Bank, has been and will continue to be critical in bolstering the euro. All in all, inflationary pressures for Korea from monetary easing will be limited."

The central bank lowered its key rate last month to 2.75 percent from 3 percent, in a widely expected decision. It lowered this year’s growth forecast to 1.5 percent, down from the previous forecast of 1.9 percent amid the deepening economic downturn.

The BOK said it initially projected that U.S. tariffs on China would be imposed after the second quarter and other countries would be affected next year. However, the advancing timeline of the tariffs and the increases in the tariff rates exacerbated the uncertainties in the trade conditions, it said.

The Korean won traded at 1,458.2 won against the dollar as of 3:30 p.m., Tuesday, 5.9 won weaker than the previous session.