South Korea’s central bank chief assumed a cautious stance Thursday over China’s dramatic depreciation of its currency for the third consecutive day, claiming that the consequences for the nation’s economy could be complex.
Lee Ju-yeol, governor of the Bank of Korea, also said that China’s financial uncertainty, together with the volatility of the global market and the instability of emerging countries, will act as risks to the Korean economy this year.
“We will keep a close watch on the market (without changing the rate) as an excessive fluctuation in the exchange rate is undesirable,” Lee told a news briefing.
BOK chief Lee Ju-yeol speaks at a press conference on Thursday in Seoul. (Yonhap)
“But the aftermath of China’s currency devaluation is certainly a major variable in Korea’s export competitiveness and (possible) capital outflow, so we will contemplate all possible scenarios and work out countermeasures.”
His remarks came after the BOK’s monetary policy committee announced it would hold the base interest rate at 1.5 percent, citing signs of economic recovery and increased market volatility. He added that the rate-setting decision was unanimous.
“The economy has taken a gradual uptrend, due to expansionary policies and the termination of the Middle East respiratory syndrome outbreak,” Lee said.
The bank chief added that volatility in the financial market has sharply increased due to expectations of a U.S rate hike and China’s recent currency devaluation, added to the domestically snowballing household debt.
He went on to say that China adjusted the base rate so as to reduce the gap with the market rate, and this change coming from Asia’s largest economy had a substantial impact on Korea.
“Instead of focusing on individual impacts, such as exports and capital flight, we will keep an eye on how the yuan rate affects the global capital flows in general.”
Amid the Chinese impact, Korea’s bankruptcy risk index surged in August, with its Credit Default Swap index on five-year foreign exchange stabilization bonds recording 63.10 base points, hitting a record high in the past six months.
Meanwhile, the People’s Bank of China announced Thursday that there would be no further depreciation of the renminbi, upon which the benchmark Korea Composite Stock Price Index rebounded after days of diving.
Lee also added that China’s rate change will not directly impact the upcoming U.S. rate hike.
“The Fed has repeatedly hinted at a rate hike within the year, and the Federal Open Market Committee’s resolution in July seems to add weight to the forecast,” he said.
But market observers are divided when it comes to the timing, with some predicting September and others saying December.
“The BOK has reviewed both possibilities and set up the respective countermeasures.”
As to concerns that foreign capital will rush out of the Korean market and into the U.S. market, the BOK chief said that such a drastic outflow is not likely to happen.
“Korea, with its strong economic baselines and financial soundness, is differentiated from other emerging states,” Lee said.
“Even if the U.S. rate hike does occur, the increasing curve will be gentle and the consequences slow.”
The central bank predicted the nation’s growth rate for next year at 3.3 percent.
“Due to the supplementary budget, we will be able to keep the rate over the 3 percent line, but in order to prevent growth from falling into the 2 percent range, structural reform is absolutely necessary,” Lee said.
By Bae Hyun-jung (tellme@heraldcorp.com)
