Seoul to take measures to stabilize FX, fin markets amid growing volatility

[Photo by Lee Chung-woo]

South Korean financial and economic authorities will take necessary measures to calm the country’s financial and foreign exchange markets if needed as the U.S. Federal Reserve’s another big rate hike this week is set to further depreciate the Korean currency and raise interest rates and inflation.

According to Bank for International Settlements (BIS) on Thursday, the real effective exchange rate (REER) of the Korean won stood at 97.19 in September, the lowest in more than 10 years since 97.11 in May 2012.

REER measure the real value of a currency in relation to an index or basket of 60 other major currencies. The lower a country’s REER, the more undervalued its currency compared to other nations.

The Korea won’s REER had remained above 100 after rebounding from a record low of 72.32 in January 1998. The index, however, dopped below 100 this year due to the rapid depreciation of the Korean won. The drop in the won’s REER in September was the third largest after the United Kingdom (-3.9 percent) and Japan (-3.2 percent).

And worse yet, downside risk is growing for the Korean won following the Fed’s fourth consecutive 0.75-percentage point hike that has widened the gap between the key interest rates of Korea and the U.S. to 1 percentage point for the first time in three years and three months.

The bigger rate gap would trigger capital outflow from Korea, resulting in the weaker won, higher import prices and worsening domestic prices.

The Bank of Korea is widely expected to deliver a rate hike in this year’s last rate-setting meeting on Nov. 24 but it remains to be seen whether it will take a baby step of a 25-basis point hike or a big step of 50 basis point hike.

Some bet that the central bank will go with a big step to prevent foreign capital outflow and tame inflation that gained 5.7 percent in October.

Financial authorities are keeping a close eye on growing uncertainties in the Korean economy.

“We will respond by staying more vigilant than any other time,” Finance Minister Choo Kyung-ho said after an emergency meeting on macroeconomic situations with BOK Governor Rhee Chang-yong, Financial Services Commission Chairman Kim Joo-hyun, and Financial Supervisory Service Governor Lee Bok-hyun.

“The local financial and foreign exchange markets could face increased uncertainty following the U.S. Fed’s rate hike while concerns about the global economic slowdown are growing,” said Lee Seung-heon, senior deputy governor at BOK. “We will take market stabilization measures in a timely manner should volatility grow.”

By Kim Jung-hwan, Ryu Young-wook, and Lee Eun-joo