Post by : Saif Rahman

The Bank of Korea has issued a warning indicating that inflation could surpass forecasts next year if the won continues to lose value against the U.S. dollar. Should the exchange rate hover around 1,470 won per dollar, consumer prices may exceed current predictions.

In November, the headline inflation rate climbed to 2.4 percent year-on-year—exceeding the bank's two percent target for the third consecutive month. A depreciating won results in higher costs for imported goods, which can subsequently elevate domestic prices.

Governor Rhee Chang-yong emphasized the importance of preventing significant dollar outflows from the nation's $350 billion investment fund from destabilizing foreign exchange rates. This fund is integral to South Korea's trading relationship with the United States.

Additionally, Rhee urged the National Pension Service, one of the country’s largest investors, to maintain a keen focus on macroeconomic conditions. The pension fund's dollar investments abroad have contributed to the won's decline. Rhee suggested employing currency hedging strategies to safeguard the value of overseas investments.

On Wednesday, the won dipped by 0.5 percent, reaching 1,480.4 per dollar, closely approaching its lowest level in 16 years. Economists caution that a prolonged weak won could lead to rising costs of goods and services, making living expenses more burdensome for households and businesses.

The Bank of Korea's findings stress the need for vigilant exchange rate monitoring and the management of large investment flows as essential measures to control inflation. Authorities may intervene if a persistently weak won jeopardizes price stability or economic growth.

Maintaining a stable currency is crucial for regulating living costs and fostering economic confidence. South Korea will require coordinated efforts between the central bank and key investors to mitigate these risks in the year ahead.

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