Rhee Chang-yong, the Bank of Korea governor, pointed to the recently surging won-dollar exchange rate as the main reason for holding the benchmark interest rate at 2.5% on the 15th. But he drew a line, saying he does not agree with the argument that the rate should be raised to rein in the exchange rate.
Rhee Chang-yong, the Bank of Korea (BOK) governor, said "an undeniable fact" when asked at a press briefing at the BOK headquarters in Jung-gu, Seoul, on the morning of the day, whether the exchange rate was the most important factor in deciding this rate.
Rhee said, "If you break down the rise (in the exchange rate) to the 1,470-won level early in the year, about three-quarters was due to a stronger dollar and a weaker yen," adding, "the remaining roughly one-quarter rose due to factors unique to us."
As depreciation factors unique to Korea, he cited persistent individual demand for dollars centered on Korean retail investors trading U.S. stocks. He said, "Recently, dollar-selling volume has been steadily coming out due to the National Pension Service's hedging, but individual investors' overseas stock investment is increasing at a faster pace than in October and November last year."
He said, "There is still an expectation that U.S. stocks will rise further or that the won will depreciate," adding, "For market stabilization, there is a need to change the short-term supply-demand imbalance and expectations of won depreciation."
He pushed back against the claim that the Bank of Korea (BOK) flooded the market with liquidity and drove the exchange rate up, saying, "That is not true." He said, "What I have focused on most over the past three years since taking office as governor is household debt," adding, "As a result, the M2 (broad money) growth rate or level has not increased compared with before."
He said, "Without checking this, people say M2 increased and that pushed the exchange rate up, so I don't know how to respond," adding, "It is disconcerting that this talk has gradually spread to many claims that the Bank of Korea (BOK) pumped a lot of money and raised the exchange rate."
However, he said he has no intention of raising the benchmark rate to ease the upward trend in the exchange rate. Rhee said, "I am not convinced by the claim that simply raising the benchmark rate would solve the exchange rate problem," adding, "Rate policy is not conducted with only the exchange rate in mind."
Rhee said, "To rein in the exchange rate with interest rates, a 25bp (1bp=0.01 percentage point) move would not suffice; you would have to raise 200bp or 300bp," adding, "In that case, countless people could suffer, so we need to make a judgment after comprehensively considering the various effects."