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Title: Inflation at 24-yr high adds to strains in South Korea's economy

Jul 04, 2022 11:45PM ET

By: AnalysisWatch

Inflation in South Korea last month hit its highest since the Asian financial crisis more than two decades ago, raising signs of rising tensions in the open and trade-dependent economy and boosting expectations of a big interest rate hike by the central bank.

On Tuesday, data showed that the consumer price index rose at a slightly faster-than-expected 6.0 percent year on year in June, the highest rate since November 1998, while other data showed that foreign exchange reserves shrank by the most since late 2008.

Economists and market experts dismissed the immediate risk of Asia's fourth-largest economy falling into crisis, as has happened several times in the past, thanks to significant improvements in its international balance of payments and debt profile.

Reflecting the strain, the credit default swap premium on the country's five-year global government bonds has shot up 30.57 basis points this year to date to 52.54, the highest since the COVID-19 pandemic began in early 2020.

Local financial markets showed no signs of panic on Tuesday, with the view that the problems facing the country are mostly from abroad and are a global trend.

Stock, bond, and currency markets posted small gains.

President Yun ordered public sector reform, calling for a sell-off of unused assets and cost savings, while pledging to chair an emergency meeting on the economy every week.

On Tuesday, the Bank of Korea said it sold some of its foreign exchange reserves for the fourth straight month in June to "ease volatility in the foreign exchange market," a phrase used to describe its intervention.

It did not disclose how much it had sold, but the intervention, as well as the sharp appreciation of the dollar against other major currencies, led to the value of its foreign exchange reserves in dollars shrinking by $9.43 billion in June.

At the end of May, South Korea's foreign reserves ranked ninth in the world, and their value of 438.28 billion U.S. dollars was enough to cover imports for more than seven months based on this year's average monthly amount.

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