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BOK chief warns about won-dollar rate's impact on inflation: Not 'traditional' but still a 'crisis'

Published: 17 Dec. 2025, 21:06

Bank of Korea (BOK) Gov. Rhee Chang-yong speaks during a press briefing on inflation in Seoul on Dec. 17. [YONHAP]

Bank of Korea (BOK) Gov. Rhee Chang-yong said Wednesday that the current won-dollar exchange rate can be described as a crisis in terms of its impact on inflation and inequality, though it does not constitute a financial crisis in the traditional sense.

Rhee made the remarks during a press briefing on inflation in Seoul, where he pointed to imbalances in foreign exchange (FX) supply and demand as a key factor behind the weak won, and urged the National Pension Service (NPS) to take into account the macroeconomic effects of its overseas investments.

“The current foreign exchange market situation does not amount to a traditional financial crisis involving failing financial institutions or a risk of sovereign default. But it can be considered a crisis in the sense that the exchange rate could have a significant impact on inflation and creates an environment in which social cohesion becomes more difficult,” Rhee said.

“Given concerns about widening growth polarization, the current exchange rate is not at a level we can feel comfortable with,” he added.

The local currency has remained below the closely watched 1,450 won level amid heavy overseas investment by local investors and the selling of domestic shares by foreign investors following recent gains.

The won was quoted at 1,479.8 per dollar as of 3:30 p.m., down 2.8 won from the previous session, nearing its weakest level since April 9, when it closed at 1,484.1 won. The April figure marked the lowest level since March 12, 2009.

Authorities have pledged to take appropriate measures to ensure market stability.

On Monday, the finance ministry and the BOK announced a one-year extension of a foreign currency swap agreement with the NPS.

Officials said the BOK has resumed currency swap transactions with the NPS, though the exact timing and scale have not been disclosed. The deal has a ceiling of $65 billion.

“I think the NPS should be less transparent about the timing of when it initiates or suspends currency hedging,” Rhee said. “Now is the time for it to manage its overseas investments while taking into account their macroeconomic spillover effects.”

Exchange rates are displayed at a currency exchange booth on Myeongdong Street in central Seoul on Nov. 26. [JOONGANG ILBO]

The finance ministry, the BOK, the NPS and the welfare ministry that oversees the pension fund have formed a four-party consultative body and will work to devise a new framework to align the NPS' investment returns with market stability and to ease the FX market volatility.

“The NPS has said it will pursue strategic currency hedging in a more flexible manner, not being overly transparent, and I think it was significant progress,” Rhee said.

In a released statement, the BOK said that the pass-through effect of the weak currency on prices could intensify if the exchange rate stays at around the current level of 1,470 won through next year.

The BOK's latest inflation forecast for next year, presented last month, stands at 2.1 percent.

Consumer inflation has already picked up, rising from 2.1 percent in September to 2.4 percent in both October and November, driven by rising prices of agricultural products and petroleum products, as well as a surge in service prices due to strong holiday demand.

Overall, however, core inflation is likely to remain stable at around 2 percent in 2026, reflecting the modest pace of the economic recovery. Core inflation excludes food and energy prices, which tend to be highly volatile.

Global oil prices, which have a significant influence on core goods prices, are expected to decline for the time being, acting as a downward factor on inflation, according to the BOK.

“Though an economic recovery is expected to create some upward pressure on inflation, its overall impact on prices is likely to be limited,” the BOK said. “The ongoing recovery is driven mainly by the semiconductor and other technology sectors, which could further limit the impact of growth on inflation.”

Yonhap