S. Korea's financial watchdog chief worries about unheard-of "perfect storm"-Xinhua

S. Korea's financial watchdog chief worries about unheard-of "perfect storm"

Source: Xinhua| 2022-06-23 19:33:30|Editor: huaxia

SEOUL, June 23 (Xinhua) -- South Korea's financial watchdog chief on Thursday expressed worry about an unheard-of economic "perfect storm" with rising inflationary pressures, higher interest rates and a possible economic recession.

Lee Bok-hyun, chief of the Financial Supervisory Service (FSS), said in a meeting with heads of economic think tanks that global inflationary pressures mounted on the deepened supply chain disruptions, driven mainly by geopolitical risks in Europe, amid the continued COVID-19 pandemic.

South Korea's consumer price index (CPI) jumped 5.4 percent in May from a year earlier, marking the fastest increase in almost 14 years. The CPI grew faster this year with the rises of 3.7 percent in February, 4.1 percent in March, and 4.8 percent in April each.

In May, the CPI in the United States and the European Union (EU) soared 8.6 percent and 8.1 percent respectively.

To curb the runaway inflation, the Bank of Korea (BOK) has raised its benchmark interest rate five times since August last year, including a 25-basis-point hike in May.

Market watchers expected the BOK to lift rates further later this year as the U.S. Federal Reserve hiked its key rate by 0.75 percentage points earlier this month, the steepest hike since 1994.

The FSS chief said a possibility for economic recession increased given the series of downward revisions for growth outlooks by international agencies including the World Bank.

The South Korean government lowered its 2022 outlook for real gross domestic product (GDP) growth to 2.6 percent earlier this month from 3.1 percent estimated six months earlier.

Downgraded growth forecasts for the South Korean economy stood at 2.5 percent from the International Monetary Fund (IMF) and 2.7 percent from the Organization for Economic Cooperation and Development (OECD).

The South Korean government revised up this year's inflation outlook by 2.5 percentage points to 4.7 percent, lower than the OECD's 4.8 percent but higher than the IMF's 4.0 percent.

Lee noted that some experts compared the current situation to the oil shock in the 1970s when the global economy suffered both inflation and economic downturn, warning that a far more serious crisis could come given the closely-intertwined global value chain in addition to the overall supply shortage of raw materials and surging demand.

"Literally, an unheard-of 'perfect storm' could come up," Lee said referring to an economic crisis where a combination of bad events occurs simultaneously.

Hit by growing concerns about inflation and economic slump, the benchmark Kospi declined 1.22 percent to finish at 2,314.32 on Thursday, the lowest close in about 19 months since Nov. 2, 2020.

Foreign investors dumped domestic stocks worth over 5 trillion won (3.8 billion U.S. dollars) this month alone.

The South Korean currency kept depreciating. The won/dollar exchange rate rose 4.50 won to close at 1,301.80 won per dollar, the lowest in almost 13 years since July 13, 2009.

Lee Seung-heon, BOK deputy governor, told a forum in Seoul that the central bank should put its monetary policy priority on the prevention of inflation expectations from expanding or being prolonged, indicating further rate hikes this year.

Lee said inflation expectations in South Korea stayed at a relatively low level compared to major economies due to the BOK's preemptive rate hikes, but he worried that price instability could be protracted if expectations spread for prices to rise further.