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Friday July 18, 10:31 AM S. Korea Needs Anti-Inflation Policy Mix: Moody's $all $sk $eco $reg $ret $bnk SEOUL, July 18 Asia Pulse - South Korea's recent currency market intervention to defend the declining won might help tackle its spiraling inflation but it will not completely shield the domestic market from global price hikes, a ranking official of Moody's Investors Service said, hinting an interest rate hike could be another option on the table. "What we see in the region is that the fight against inflation is not simple and will require a combination of policy measures," Tom Byrne, Moody's senior vice president and sovereign regional credit officer for Asia and the Middle East said in a recent e-mail interview with Yonhap News Agency. "The exchange rate is one, but alone cannot do the job." South Korea's government recently shifted its policy priority from economic growth to stabilizing prices as soaring oil and commodities costs caused consumer prices to accelerate to a 10-year high of 5.5 per cent in June. To help keep inflation in check, the Finance Ministry is pushing to raise the won's value against the U.S. greenback, which it expects would reduce import costs and ease mounting inflationary pressures. This marked a turnaround from its apparent support for a weaker won aimed at boosting exports and helping reduce the nation's current account shortfall. On July 4, the won fell to a 32-month low of 1,050.4 won against the U.S. greenback as demand for the dollar had been boosted by rising oil prices and a massive exodus of foreign funds from local stock markets. The currency had lost more than 12 per cent since the beginning of this year. That plunge prompted foreign exchange authorities to announce on July 7 that they could use some of the nation's US$258 billion foreign reserves to prop up the declining won. Along with the move, they eased restrictions on foreign currency borrowing by state-run companies in a bid to increase dollar inflows into the local currency market. Following the announcement, the authorities have reportedly sold around $10 billion worth of the dollars, raising the won's value by nearly 4 per cent as of July 17. Byrne said that foreign exchange adjustment might be an effective way to tame inflation but it should come with other policy measures if it is to achieve its intended goal. "We see this in Singapore, whose sole tool is the exchange rate. Despite a 12 per cent appreciation against the dollar so far this year, Singapore's CPI inflation rate of 7.5 per cent is the highest in more than 25 years," Byrne said. "Exchange rate adjustment alone cannot completely shield the domestic economy from global inflation," he noted. Byrne didn't directly mention the option of raising the nation's policy interest rate but he worried that the current negative real interest rates could dent creditability of its anti-inflation commitment. "All other things equal, this may undermine the anti-inflation credibility of the BOK if negative real interest rates persist for a long period," he said. The BOK left its key interest rate for July unchanged at 5 per cent for the 11th straight month. Earlier this year, the central bank was under pressure to cut the interest rate to help resuscitate the slowing local economy, after freezing it in consideration of mounting inflationary pressure. After the rate decision, however, BOK Gov. Lee Seong-tae said that the central bank "cannot but think about its original task," signaling a possible rate hike down the road. Some observers have expressed concerns that such a tightening of monetary policy could dampen the nation's already-slowing economy, whose growth outlook was recently slashed to below 5 per cent from an earlier 6 per cent due to toughening economic conditions. Meanwhile, as for worries that the government's use of foreign reserves to sustain the won's value could fail to achieve its intended goal, only to reduce the reserves, Byrne said that many Asian countries had learned a lesson from the financial crisis in the late 1990s that their "prudent" management is important to cushion the nation from external shocks. "East Asian governments have realized post-1997 crisis that a large buffer of official foreign exchange reserves coupled with prudent management of bank's foreign exchange exposure and balance sheets provides a good amount of insulation to external shocks," Byrne said. "We will be monitoring how Korea maintains its still relatively strong external payments position and keeps it from weakening to any significant degree," he added. (Yonhap)