South Korea Warns Weaker Won Could Push Inflation Higher

Post by : Saif Nasser

South Korea’s central bank has warned that inflation may rise more than expected next year if the won stays weak against the U.S. dollar. The Bank of Korea said that if the exchange rate remains around 1,470 won per dollar, consumer prices could rise above current forecasts.

In November, headline inflation rose 2.4 percent compared with a year earlier. This is above the bank’s target of two percent for the third month in a row. A weaker won makes imported goods more expensive, which can push domestic prices higher.

Governor Rhee Chang-yong said the bank will ensure that large dollar outflows from the country’s $350 billion investment fund do not hurt foreign exchange stability. The fund is part of South Korea’s trade agreement with the United States.

Rhee also called on the National Pension Service, one of the largest investors in the country, to pay closer attention to the macroeconomy. The pension fund has been buying dollars to invest overseas, which has contributed to the weaker won. Rhee suggested that currency hedging be used to protect the value of overseas investments.

On Wednesday, the won weakened 0.5 percent to 1,480.4 per dollar, near its lowest level in sixteen years. Economists warn that a prolonged weak won could raise the cost of goods and services, making life more expensive for households and businesses.

The Bank of Korea’s report shows that monitoring the exchange rate and managing large investment flows will be key to keeping inflation under control. Officials may take steps if the weak won threatens price stability or economic growth.

A stable currency is important to control living costs and maintain confidence in the economy. South Korea will need careful coordination between the central bank and major investors to manage these risks in the coming year.