Weak won fuels inflation, deepens economic polarization: BOK head

Bank of Korea Gov. Rhee Chang-yong speaks during a press conference at the bank's headquarters in Seoul, Wednesday. Yonhap

The sharp weakness of the Korean currency against the U.S. dollar is not a sign of a “financial crisis” in the traditional sense, but it is a significant concern because of its implications for social and economic cohesion, the country’s top monetary policymaker said Wednesday.

Bank of Korea (BOK) Gov. Rhee Chang-yong said the Ministry of Health and Welfare’s recent decision to factor currency dynamics into the operation of the National Pension Service (NPS), the state pension fund, represents meaningful progress. He added that the NPS needs strategic ambiguity, keeping the beginning and end of its currency hedging undisclosed, to temper expectations about the currency’s trajectory.

“Korea is currently a net external creditor, so the possibility of a sovereign default accompanied by a series of financial entity closures is low,” Rhee said during a press conference at the bank's headquarters, Wednesday.

However, the weak won has heightened inflation concerns by driving up import prices, placing additional strain on households. Importers have also been affected, particularly in the retail and construction sectors, with broader spillover effects on domestic consumption.

This contrasts with the country’s semiconductor sector and other exporters, which can compete better on price in global markets.

“The country’s social cohesion will come under threat. Rising living costs and tightening domestic consumption will add to the pressure, while the divide between those who benefit and those who suffer losses will widen,” he said.

The health ministry and the NPS agreed to outline a currency hedge strategy that accounts for the won’s value at the time of both investment and liquidation, a development Rhee lauded, given the pension fund’s significant influence on the country’s broader macroeconomic and foreign exchange (FX) markets.

“The NPS’s currency hedging strategy should be less transparent to limit sustained swings in the FX market,” he said.

Also, the pension fund should be able to consider the mismatch in its won-denominated returns between when they increase holdings in offshore investments and when they liquidate them back into the country.

“The NPS is exerting a major influence in the market, unlike a decade ago. Their investment strategy should factor in the country’s macroeconomic implications,” he said.

Meanwhile, the central bank report released earlier in the day projected that if the won remains around 1,470 per dollar through next year, headline inflation could rise to the mid-2 percent range.

In November, the central bank estimated that next year’s headline inflation would stand at 2.1 percent.

The won-dollar rate closed at 1,479.8 won against the dollar, Wednesday, up 2.8 won from the previous session. The rate hit an intraday highof 1,482.3 won.