Speculation over a third large rate hike of 75 basis points by the US Federal Reserve next week runs higher than ever, but the Bank of Korea sought to reassure market watchers Tuesday that preparations to cushion its impact were underway.
“We have to step up monitoring of capital inflows and outflows and currency markets,” said Lee Seung-heon, senior deputy governor at the central bank, warning against growing uncertainties: a hawkish US Fed and a like-minded European Central Bank.
The ECB last week lifted its key rate to 0.75 percent from zero, mirroring an aggressive US rate hike campaign that took off in June with a historic 75 basis point raise. The US Fed backed the same hike in July to corral inflation.
The August Jackson Hole meeting of central bankers from around the world -- highlighted by Fed Chairman Jerome Powell’s open reluctance to move away from tightening until prices are brought down -- has since emboldened investors to price in a third large hike at the Fed’s Sept. 20-21 meeting. Policymakers have done little to change the expectation.
The result was a rallying US dollar, with the dollar index having already soared to a 20-year high. The greenback rose in value against all six rival currencies, including the Japanese yen. Emerging markets saw their currencies tumble and Korea has not been immune to the volatility that had prompted policymakers to publicly mull intervention.
On Tuesday, the Korean won closed at 1,373.6 won per dollar on an onshore trading platform. A red flag for the economy, the psychological threshold of 1,300 won per dollar was last breached in 2009 in the wake of the global financial crisis before being recently crossed in June. Hints at intervention authorities had conveyed proved to be ineffective.
But the recent depreciation of the won “seems a bit faster than warranted, given our economic fundamentals,” the BOK said on Sept. 7. The Finance Ministry still supports the assessment, with the minister contending that the economy was still sound and could withstand changes in the global economy, such as soaring global energy and food costs and tighter policy embraced by major economies.
The rhetoric is increasingly becoming hollow as incoming data all paint a darker outlook in which the trade-reliant economy may not have all the resources or the time to combat the global headwinds.
According to the latest BOK data this week, Korea’s gross domestic product improved slightly in the second quarter, but underperformed that of most OECD countries amid economic slowdowns in the US and China.
The GDP rose 0.7 percent on-quarter in the April-June quarter, an incremental improvement from the 0.6 percent in the previous quarter, putting the latest growth rate at 20th among 35 countries, including the 33 member states in the OECD and two nonmembers, China and Indonesia.
Complicating growth worries is a five-month trade deficit since April. The January-August deficit of $24.7 billion has already surpassed the yearly high set in 1996, and the estimated August deficit of $9.47 billion was a monthly record high since 1956 when the government began tracking such data. Higher bills for energy and petroleum imports were blamed.
And for the first time in nearly a decade, Korea posted a deficit in its goods balance on soaring energy import bills in July, with the current account surplus dropping sharply from the same month a year earlier. The BOK had acknowledged that there could be an account deficit for August.
Despite the gloomy projection, BOK Gov. Rhee Chang-yong has categorically dismissed the possibility of stagflation -- a coupling of low growth and high prices -- saying a growth target of 2.1 percent for 2023 was not at all bad, compared with the growth other countries are expecting.
The goal, originally set at 2.4 percent in May, was cut down in late August when the bank set the policy rate at 2.5 percent after the usual hike -- half of July’s historic 50 basis point raise. Inflation has overtaken growth in the bank’s priorities, Rhee maintains. The bank is still aiming for a 2 percent price surge on annual average, though prices are expected to average 5.2 percent this year.