Seoul, July 5 (BNA): South Korea’s inflation rate last month reached its highest level since the Asian financial crisis more than two decades ago, adding to signs of building pressures on the open, trade-dependent economy and boosting expectations of a massive interest rate hike by the central bank. .
Data on Tuesday showed that the consumer price index grew slightly faster than expected by 6.0% in June from a year earlier – the highest level since November 1998 – while other data showed foreign exchange reserves shrinking the most since late 2008, Reuters reported.
Economists and market experts have dismissed any immediate risk of Asia’s fourth-largest economy falling into crisis as it has many times in the past, thanks to significant improvements in the international balance of payments and debt profile.
But some have warned that the government and the central bank are facing a difficult period.
“Policy making will become more difficult because they have a combination of upward inflation risks and ongoing downside economic growth risks at the moment,” said Park Suk Gil, an analyst at JPMorgan Chase.
The high inflation reading reinforced the case for the central bank to raise the policy interest rate by an unprecedented 50 basis points at its meeting next week.
South Korea’s vulnerability to external shocks, due to its heavy dependence on foreign trade and cross-border capital flows, has left it under pressure with increased money outflows from the domestic stock market and the depreciation of the won.
Reflecting the pressure, the default swap premium on global five-year sovereign bonds has risen 30.57 basis points this year so far to 52.54, the highest since the early days of the COVID-19 pandemic in early 2020.
Domestic financial markets showed no sign of panic on Tuesday, with the perception that the problems facing the country were mostly from abroad and a global trend. Stock, bond and currency markets posted small gains.
However, pressure is mounting on the government of conservative President Yoon Seok-yeol, who began work only two months ago and has yet to offer a broad policy blueprint on how to make a difference from his liberal predecessor.
President Yun has ordered public sector reform, calling for the sale of idle assets and spending savings, while promising that he will chair an emergency meeting on the economy every week.
Since Yun took office, the central bank has been selling dollars to tame the won’s slide to its lowest level since the 2008-2009 global financial crisis due to angering investors while simultaneously dealing with ongoing capital outflows from the stock market.
The Bank of Korea said on Tuesday that it sold a portion of its foreign exchange reserves for the fourth consecutive month in June “to smooth out volatility in the foreign exchange market,” a phrase used to describe its intervention.
It did not disclose how much it sold, but the intervention as well as the dollar’s surge against other major currencies caused the dollar’s value of its foreign reserves to shrink by $9.43 billion in June.
Currency traders ignored the decline in foreign exchange reserves, saying that it was largely expected and also attributed to changes in the value of the dollar, while warning that more sharp and uncontrolled changes could be a problem.
South Korea’s foreign reserves ranked ninth in the world at the end of May at $438.28 billion, enough to cover more than seven months of imports based on the average monthly amount for the year.
MI