Investing.com - The central bank of South Korea issued a warning on Thursday, emphasizing the potential risks that an early alteration in its monetary policy could have on the nation's currency. The bank stressed the importance of properly addressing these concerns and cited factors such as uncertain inflation rates, financial imbalances, and credit risks associated with the real estate market.
According to the Bank of Korea (BOK), changes in US Federal Reserve rate hikes or domestic policies may result in increased downward pressure on their local currency. In its quarterly monetary policy report submitted to parliament, BOK maintained interest rates for three consecutive meetings after raising them by 300 basis points over one-and-a-half years through January.
With a current policy interest rate of 3.50%, which is slightly above the neutral range and at its highest since late 2008, BOK acknowledged that this restrictive level has significantly decreased due to falling interest rates within local financial markets this year.
Since last year, volatility in the South Korean Won has surged beyond long-term averages following Fed's interest rate hikes. This heightened fluctuation exceeds most other currencies since August and has been exacerbated by domestic issues like trade deficits.
So far this year, the won experienced a decline of around 3% against the US dollar – following a previous decrease of roughly 6% during 2022 when it reached its lowest point in nearly fourteen years. Comparatively, gains for both years were recorded at just under half percent (0.4%) and more than eight percent (8.2%) respectively for the US Dollar Index.
Considering ongoing uncertainty surrounding core prices' resistance to downtrends and postponed public utility price increases; BOK expressed concern about how quickly inflation might stabilize moving forward. The central bank also observed that the real estate market remains overvalued, with a recent slowdown in the decline of house prices and an uptick in mortgage loans due to relaxed regulations.