With the recent surge in the won-dollar exchange rate, leaders of the Democratic Party of Korea raised the issue of the Bank of Korea (BOK)'s responsibility. They said the BOK's excessive reliance on short-term liquidity supply while responding to the real estate project financing (PF) crisis caused the won to weaken.
Lee Un-ju, a senior member of the Democratic Party, said at the supreme council meeting at the National Assembly on the 19th that concerns are mounting over Rhee Chang-yong's remarks and sense of responsibility at a time when the recent spike in the exchange rate is fueling worries about soaring dwellings prices and inflation.
Lee said that while Rhee Chang-yong seemed to intend to supply liquidity when the project financing (PF) crisis broke out in 2022, the BOK has continued to buy repurchase agreements (RPs) and recently even purchased Treasury bonds, criticizing that by flooding the market with short-term liquidity, it is driving down the value of the won.
She added that focusing on supplying short-term liquidity for a stopgap fix rather than restructuring after the real estate PF crisis is a serious problem, saying a strange situation has emerged in which the market has developed resistance, so even as liquidity is injected, market interest rates are instead rising.
While acknowledging the complex causes of the sharp rise in the exchange rate, Lee made clear the BOK's responsibility. Lee said that the exchange rate is clearly affected by large corporations increasing their dollar holdings in anticipation of investment in the United States and by China's prolonged domestic demand slump, but it is hard to say there is no responsibility at all for the BOK's failed monetary policy and the governor's lack of awareness of responsibilities among the various causes.
She also rebutted Rhee's recent explanation that a significant portion of the increase in the money supply was due to the expansion of exchange-traded funds (ETFs). Lee said that as Rhee claims, the Bank of Korea (BOK)'s M2 (broad currency) growth rate is 8.5%, but if you exclude the liquidity increase through revenue securities such as ETFs, the increase in the money supply may not differ much from that of the United States, adding that even so, this is not something to evade responsibility for while reminding people that there was still more liquidity supplied than in the United States.
Her remarks were seen as unusual within the party leadership. Even as the won-dollar rate nears 1,480 won, the Democratic Party leadership has largely refrained from commenting on the exchange rate. Within the party, the prevailing view had been that the more you provoke the exchange rate, the greater the volatility, so it is better not to speak, and that it is for the government to respond.
Meanwhile, the People Power Party criticized the government for rolling out a series of measures to ease foreign exchange soundness regulations, saying the administration should work to improve the economy's fundamentals rather than cling only to emergency steps for exchange rate stability. It said measures are needed to absorb the surge in liquidity and to create incentives to induce the domestic inflow of dollars held by corporations.