Recovery in domestic demand stronger than expected
By Kim Yoo-chul
Faster tightening of US monetary policy has increased the jitter of global financial markets, and market watchers here are closely watching whether such volatility causes a sudden capital outflow from South Korea.
Capital outflows occur when different types of assets and real money move to another country benefiting from the following favorable return on investment: B. Higher interest rates.
The Central Bank of South Korea (BOK) faces increasing pressure to act much more quickly to address growing concerns about capital outflows as the won weakens against the US dollar, and the Federal Reserve Board. The Fed continues to make great strides in raising interest rates.
The interest rate gap between South Korea and the United States will widen if BOK’s interest rate levels remain lower than the Fed, as it is widely believed that the Fed is heading for a more aggressive rate hike.
Politicians and economists have said it could ultimately lead to capital outflows from here. After raising 75 basis points in June, the Fed plans to raise rates even further as US inflation reaches its 40-year high of 9.1% at a currency meeting scheduled for July.
The interest rate on the BOK is currently 2.25%, but the Fed recently raised the US interest rate by 75 basis points to 1.50 to 1.75%.
Talking to the Korea Times, Louis Kais, Chief Economist for the Asia-Pacific region of Standard and Poor’s (S & P) Global Ratings, said South Korea suffers a significant capital outflow as South Korea’s inflation rate is not as high as in the U.S. states. He said he couldn’t.
“The Fed could raise interest rates significantly in the rest of 2022 and the first half of 2023. South Korea’s inflation is rising, but it doesn’t need to raise key interest rates as the US Federal Reserve does, Not as expensive.
In a recent interview, the chief economist said that if capital outflows and weak won remain modest and manageable, South Korea’s relatively low-interest rate and depreciation combination will be acceptable to South Korea. It could be a scenario. ”
The South Korean central bank said it could try to raise interest rates “many times” if the depreciation of the local currency (won) accelerates. Treasury officials said South Korea would avoid capital outflows only because of interest rate differentials with the US Federal Reserve Board. However, this year’s local currency has already lost more than 9% of its value against the US dollar.
When the won weakens, the trade balance usually deteriorates as the prices of major commodities such as energy and food tend to rise. South Korea relies heavily on the import of these necessary parts. Treasury Secretary Choo Kyung-Hyun has agreed to work with US Treasury Secretary Janet Yellen to stabilize the foreign exchange market and apply measures such as liquidity facilities, but only when necessary.
The $ 60 billion currency swap agreement between South Korea and the United States expired last year.
“Korea’s policy rate is 2.25% by the end of 2022 and 2.5% by 2023. It’s too early to say if this is enough to curb inflation. The effects of the economic slowdown and high-interest rates are It should be enough to curb inflation. ”
While capital outflows have remained modest so far, Kuijs said finance as BOK is working with financial regulators on coordinated policy efforts to reduce the debt burden of low-income households. He emphasized that anxiety can be a bigger problem.
In addition, monetary policymakers have taken their role as record household debt and slowing export growth momentum are seen as the main factors that BOK is reluctant to raise interest rates significantly. I find it more difficult to fulfill. In June, South Korea recorded the lowest export growth rate in 19 months, raising concerns about economic health.
“There will be a limit to the extent to which BOK can ease monetary policy. But the slower growth will ease inflationary pressures. As downward pressure on growth continues, BOK will grow.
He said the desire to support should be balanced with inflation expectations and the need to tighten policies to “avoid” monetary instability.
Kuijs said S & P expects the country’s consumer price index (CPI) to rise further “in the coming months.”
“By the end of the year, consumer inflation should begin to fall due to the effects of fewer unfavorable basis effects’, mitigating rising energy prices, economic slowdowns, and previous rises in interest rates. Inflation should be below 3% from 2023, except for fresh energy and rising commodity prices. “With rising” core inflation, “BOK is holding interest rates to curb demand and curb inflation expectations. He said he had raised it.
Core inflation is defined as a change in the cost of goods and services, excluding food and energy because food and energy prices fluctuate too much or fluctuate rapidly. The country’s CPI rose 6% year-on-year in June, while core inflation rose 4%.
“Current global inflation was initially caused by soaring energy and other commodity prices, and supply chain constraints. Such a” cost-push “if inflation expectations are firmly fixed. Inflation can pass beyond the transition period without pushing up CPI inflation.
However, as in the previous United States, South Korea’s core inflation began to rise in late 2021. That is, companies have begun to pass on rising costs, and wages have begun to rise to offset the rise in prices, “he said.
Kuijs said South Korea’s growth outlook could be revised upwards, but it turns out that the Ukrainian crisis has eased or growth in the US, Europe, and China are better than current expectations. Only if you do.
“But if headwinds intensify, we may need to lower our forecasts . South Korea’s recovery in domestic demand is slightly stronger than expected, and South Korea’s overall GDP growth forecast remains unchanged,” S & P Global Ratings Asia said. Chief Economist-Pacific said.
In a recent economic assessment report, known as the Green Book, the South Korean Treasury said the country’s economy was worried due to rising inflationary pressures and slowing export growth.
Credit/Source : https://www.koreatimes.co.kr/www/biz/2022/07/488_333120.html