Inflation at 24-year high adds to strains in S. Korea’s economy


A woman wearing a protective mask is seen at a fish market amid the ongoing coronavirus disease (COVID-19) outbreak in Seoul, South Korea April 5, 2020 REUTERS/Kim Hong-Ji

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  • June inflation at highest since 1990s Asian financial crisis
  • Foreign exchange reserves fall the most in June since the end of 2008
  • Stress mounts on new government to act quickly
  • Markets are calming down with no signs of a local crisis

SEOUL, July 5 (Reuters) – Inflation in South Korea hit its highest level since the Asian financial crisis more than two decades ago last month, adding to signs of growing strains on the open economy and dependent on trade and stoking expectations of a big rate hike by the central bank.

Data showed on Tuesday that the consumer price index rose slightly faster than expected by 6.0% in June from a year earlier – the highest since November 1998 – while other data showed showed that foreign exchange reserves had fallen the most since the end of 2008.

Economists and market pundits have ruled out any immediate risk of Asia’s fourth-largest economy sliding into a crisis as it has repeatedly in the past, thanks to significant improvements in its international balance of payments and profile. of its debt.

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But some have warned that the government and the central bank are facing tough times.

“Policy-making will become all the more difficult as they have a mix of upside inflation risks and downside economic growth risks that continue for the time being,” Park Seok-gil said, analyst at JPMorgan Chase Bank.

The elevated inflation reading bolstered the case for the central bank raising the key interest rate by an unprecedented 50 basis points at its meeting next week.

South Korea’s vulnerability to external shocks, given its heavy reliance on foreign trade and cross-border capital flows, has put it under pressure with rising local stock market outflows and declining value of the won.

Reflecting the strain, the credit default swap premium on the country’s five-year global sovereign bonds jumped 30.57 basis points this year to date to 52.54, the highest since the early days of the crisis. the COVID-19 pandemic in early 2020.

Local financial markets showed no signs of panic on Tuesday, with the perception that the problems facing the country stem mainly from abroad and a global trend. Equity, bond and currency markets all posted small gains.

THE BOK INTERVENES

Yet pressure is mounting on the government of conservative President Yoon Seok-yeol, which began work just two months ago and has yet to provide a general policy plan on how to make a difference to its liberal predecessor.

President Yoon ordered public sector reform, calling for the sale of idle assets and savings in spending, while promising that he would chair an emergency meeting on the economy every week. Read more

Since Yoon took office, the central bank has sold dollars to tame the won currency’s plunge to the lowest since the 2008-2009 global financial crisis from unnerving investors while facing sustained capital outflows. of the stock market.

The Bank of Korea said on Tuesday that it sold off some of its foreign exchange reserves for a fourth straight month in June to “mitigate volatility in the foreign exchange market”, a phrase used to describe its intervention.

It did not reveal how much it sold, but the intervention as well as the surge in the dollar against other major currencies caused the dollar value of its foreign exchange reserves to decline by $9.43 billion in June. .

Traders shrugged off the drop in foreign exchange reserves, saying it was widely expected and also attributable to swings in the value of the dollar, while warning that further abrupt and disorderly moves could be problematic.

South Korea’s foreign exchange reserves were ranked ninth in the world at the end of May and at $438.28 billion, they were enough to cover more than seven months of imports based on the monthly average amount for this year.

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Reporting by Cynthia Kim, Jihoon Lee, Choonsik Yoo; Editing by Kim Coghill and Lincoln Feast.

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