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Bank of Korea (BOK) warns weak won risks inflation as USD/KRW diverges from fundamentals
Key Takeaways (30s Read)
Bank of Korea warns that the weakness of the won may lead to inflationary pressures.
Bank of Korea Governor Rhee Chang-yong indicated that the central bank will reassess its forward guidance framework regarding interest rates. He warned that excessive weakness in the won could harm domestic businesses and exacerbate inflationary pressures, mentioning that USD/KRW levels above 1,400 appear disconnected from South Korea's economic fundamentals. The BOK will not support investment decisions that threaten foreign-exchange stability, particularly amid concerns about capital outflows by institutional investors. Rhee has called for a comprehensive review of overseas investment strategies for pension funds.
In broader economic news, South Korea's manufacturing sector returned to expansion in December, with the manufacturing PMI rising to 50.1. This recovery in the sector was driven by rebounding export demand, though rising import costs due to currency weakness remains a significant concern, potentially fuelling inflation.
AI Analyst
AI Opinion
"The comments from the Bank of Korea reflect significant concern over the impact of won weakness on the economy, particularly regarding inflationary pressures and profit margins for businesses. With USD/KRW levels above 1,400 seen as increasingly misaligned with underlying economic fundamentals, a reassessment of central bank policy seems critical. The potential expansion of lending facilities for small businesses may provide economic stability, but risks persist concerning capital outflows and overseas investments. Market participants may expect that the central bank's evolving stance will play a crucial role in facilitating currency stability."
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