South Korea's central bank on Monday underlined that containing inflation was its number one priority, fanning speculation of a near-term rise in interest rates, while the government took fresh steps to prop up the won.
Kim Byung-hwa, a deputy governor at the Bank of Korea, said inflation was more worrying to the central bank than slowing growth in Asia's fourth-largest economy or a looming current account deficit in 2008, likely to be the first in 11 years.
The finance ministry announced measures to boost overseas borrowings, widely seen as aimed at supporting the government's existing efforts to bolster the local currency by selling dollars. Authorities have declared that keeping the won strong is their main tool to fight inflation, which is being largely fuelled by the rising cost of oil and other raw materials imports. They have dumped some $20 billion in currency markets in recent months to make their point.
Currency dealers once again spotted authorities selling dollars to support the won on Monday, although they said the intervention appeared much smaller than last week.
"What's most worrying among the slowing economic growth, accelerating price growth and current account deficit is the unstable prices," Kim said during at a seminar hosted by the Korea Chamber of Commerce and Industry. Economic growth has been slowing this year, but neither this nor the current account deficit is that worrying at present, Kim said.
Annual consumer inflation hit a near 10-year high of 5.5 percent in June, staying above the central bank's 2.5 percent-3.5 percent target for a seventh consecutive month. Treasury bond futures fell and the won fell slightly on Monday. Dealers said they suspected intervention to support the won when it fell to the day's low around 1,006 per dollar. The currency closed local dealings at 1,004.50, edging down from 1,002.3 on Friday.
MEASURES TO DEFEND WON: Kim's remarks were in line with comments by Governor Lee Seong-tae. Last Thursday, when the Bank of Korea held interest rates steady for an 11th consecutive month, he said the authority should stick with its basic task of reining in inflation.
Domestic bond prices, especially those of short-dated paper, have fallen sharply since then to factor in an increased chance of a rate rise. Lee said that exchange rates alone could not contain inflation, although he did not directly say interest rates should be raised.
The yield on 1-year treasury bonds has jumped a combined 19 basis points to 5.48 percent over three trading sessions, compared with the central bank's benchmark interest rate of 5.0 percent. The central bank plans to next review policy on August 7. In its latest measure to support the won, the Finance Ministry said it was lifting seven-month old controls on overseas borrowings by foreign bank branches.
The change could bring about $10 billion into the country this year, a ministry official said. Another ministry official said later it may remove limits on local banks in taking dollar/won offers in non-deliverable forwards (NDFs) trading, which could encourage exporters to sell off future dollar revenues in advance.
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