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Governor Rhee's Press Conference Stresses Inflation Fight

BOK

BoK Governor Rhee's press conference has come across as more hawkish, with the inflation fight the top near term priority. The 2yr onshore swap rate is close to 6bps higher and tracking to 2.92%, while the 5yr has moved up by the same amount to 3.03%. 1 month USD/KRW has moved off its highs, back to 1266, but broader risk flows remain a key driver of the won.

  • The Governor noted the peak in inflation is expected to be seen in 2H22, with annual rate expected to exceed 5% for the coming 3 prints (May, June and July).
  • Inflation will remain in the 3-4% range early next year, which is still comfortably above the BoK's 2% target rate. On this point, Rhee stated that there is no need for the BoK to adjust this target inflation rate.
  • On the emphasis re: 'foreseeable future' in terms of the focus on inflation from the policy statement, Governor Rhee stated this can be interpreted as a few months. This is likely to reflect the fact that inflation will spike above 5% YoY through this period.
  • The negative risk of rising inflation is the bigger issue that needs to be addressed at the moment. This echoes the BoK statement, where inflation was clearly the priority over growth.
  • On growth, GDP is expected to rise 2.7% this year and 2.4% next year. He stressed that the projection for this year would still see the Korean economy growing more quickly than potential.
  • The extra budget, if passed, is expected to add 0.1% to CPI, but also boost growth by 0.2-0.3ppts.
  • Governor Rhee elaborated on the "big step" adjustment in rates comment that he made in recent weeks. He stated that a lot of factors need to be considered in adjusting rates, particularly in such an uncertain environment.
  • He also stated that the policy rate is not yet at neutral and that market projections for the policy rate of 2.25-2.5% by year end is reasonable.
  • On the FX front, Governor Rhee stated the BoK continues to monitor FX markets and capital flows closely. The central bank is not worried about capital outflow pressures at this stage.
  • In terms of FX cooperation with the US, he stated this is part of broader strategic cooperation between the two countries. The Korean Finance Ministry is still negotiating with US authorities on this matter he stated.
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