South Korea Inflation Risk Rises as Won Weakens

Post by : Saif

South Korea’s central bank has warned that inflation could rise more than expected next year if the won remains weak against the U.S. dollar. The Bank of Korea said a sustained exchange rate near 1,470 won per dollar could push consumer prices higher and exceed current forecasts.

In November, South Korea’s headline inflation rose 2.4 percent from a year earlier. This was 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 add pressure to domestic prices.

Governor Rhee Chang-yong said the bank would manage dollar outflows linked to the country’s $350 billion investment fund under a trade deal with the United States. The goal is to keep foreign exchange markets stable and prevent sudden swings in the won.

Rhee also highlighted the role of the National Pension Service, one of the largest investors in South Korea. The pension fund has been buying dollars to invest overseas, which contributes to the weakening of the won. He urged the NPS to use currency hedging and consider the impact of its investments on the broader economy.

On Wednesday, the won fell 0.5 percent to 1,480.4 per dollar, close to a 16-year low. Economists say a continued weak won could affect prices for goods and services in South Korea, making it more expensive for households and businesses.

The Bank of Korea’s report emphasizes that monitoring the exchange rate and managing foreign investment flows will be key to controlling inflation. Authorities may take measures if the won’s weakness threatens price stability or domestic economic growth.

A strong and stable currency is important to keep living costs under control and maintain confidence in the economy. South Korea will likely need careful coordination between the central bank and large investors like the NPS to manage these risks in the coming year.

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