IMF downplays danger of forex volatility for Korea, urges focus on inflation

The International Monetary Fund's Asia director said the current exchange rate volatility does not pose a significant challenge to Korea, calling for the Bank of Korea to decouple from the U.S. Federal Reserve's monetary policy.

Krishna Srinivasan, Director of the Asia and Pacific Department at the International Monetary Fund, reacts during a news conference at the Sri Lanka's Central Bank premises, in Colombo, Sri Lanka May 15, 2023. [REUTERS/YONHAP]

Exchange rate volatility does not pose significant challenges to Korea, and its policymakers should concentrate on domestic issues including inflation, according to the International Monetary Fund (IMF) on Thursday.

“In the case of Korea, I would say exchange rate volatility does not pose significant economic challenges given limited currency mismatches and manageable pass through to inflation,” said Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, during a press briefing.

A currency mismatch is an incongruence in the currency composition of assets and liabilities, with assets denominated in domestic currency and liabilities in foreign currency.

The remarks followed a joint trilateral statement by Korea, the United States and Japan on Wednesday in which they acknowledged the sharp depreciation of won and yen against the greenback.

The won broke 1,400 to the U.S. dollar on Tuesday following armed conflict between Iran and Israel.

It was the weakest since November 2022, when the won reached 1,413.5 mid-trading. The government issued a verbal intervention, warning that the excessive tilt in the foreign exchange market is not beneficial to the country’s economy.

Srinivasan also stressed that Korea’s central bank should concentrate on domestic matters instead of the expected movement of the U.S. Federal Reserve in a bid to preserve financial and economic stability.

“The focus of monetary policy in Korea should be on inflation... It should be firmly on the tightening mode until inflation comes back to target,” he said, adding, “Don’t be overly focused on what other central banks are doing.”

Bank of Korea Gov. Rhee Chang-yong said in the last post-policy press conference on April 12 that the Fed's signal of a pivot, despite lingering inflation, has given the world’s central banks room to decouple from its monetary policy.

Rhee that added the recent weakening of the won is due to the strengthening of the dollar that is in turn driven by an expectation of a pivot by the U.S. central bank.

As tensions in the Middle East escalated following Israel’s reported launch of a retaliatory strike against Iran on Friday, Korea’s Finance Minister Choi Sang-mok said that the government is ready to respond immediately with market stabilization funds amounting to 94 trillion won ($68 billion) to take instant and stern steps to quell excessive foreign exchange market volatility.

He added that the overseas crisis has not directly affected the country's energy, exports or imports.

The IMF projects Korea to grow 2.3 percent this year, according to its latest estimate earlier this month, which is in line with the previous projection made in January.

BY JIN MIN-JI [jin.minji@joongang.co.kr]