[Weekly Review] Exchange Rate Breaks 1300 Won... 'Seomin Inflation' Already Up 7.4%

On the 7th, cargo trucks were parked at the Inland Container Depot (ICD) in Uiwang-si, Gyeonggi Province, as the Cargo Solidarity Union launched a general strike demanding the abolition of the sunset clause on safe freight rates and an increase in transportation fees due to high oil prices. Photo by Moon Honam munonam@

[Asia Economy Sejong=Reporter Dongwoo Lee] The won-dollar exchange rate briefly surpassed 1,300 won on the morning of the 23rd. It is the first time in about 13 years since the global financial crisis that the exchange rate has reached the 1,300 won level.

On that day, the won-dollar exchange rate started at 1,299.0 won in the Seoul foreign exchange market and exceeded 1,300 won within 9 minutes after the market opened, increasing its rise to reach 1,302.8 won around 9:30 a.m. It is the first time in 12 years and 11 months since July 14, 2009 (the high was 1,303.0 won) that the won-dollar exchange rate reached 1,300 won during trading hours.

Exchange Rate Breaks 1,300 Won... Powell Says "US Recession Possible"

Overnight, Jerome Powell, chairman of the US Federal Reserve (Fed), hinted at a strong response to inflation and acknowledged the possibility of a recession, strengthening the preference for the safe-haven dollar.

On the 22nd (local time), Powell appeared before the US Senate Banking Committee and was asked whether he thought the Fed's interest rate hikes could lead to an economic downturn. He replied, "There is definitely a possibility." He added, "A soft landing is a very challenging task." This marked a step back from his emphasis just a few days ago that a 'soft landing'?lowering inflation without cooling the economy?could be achieved. These remarks came amid a flood of reports from Wall Street investment banks indicating an increased probability of a recession.

Domestic experts foresee that the won-dollar exchange rate will continue to rise for the time being, as there are no downward factors for the exchange rate and supply-demand factors are worsening, including the continued outflow of foreign funds from the domestic stock market.

Moon Hongcheol, a researcher at DB Financial Investment, said, "Overnight, Powell's confirmation of his determination to control inflation increased the market's risk-asset avoidance sentiment," adding, "Concerns about economic slowdown and accelerated tightening by major central banks persist, so the exchange rate will likely keep its upper range open for the time being."

'Common People's Prices' Already Up 7.4%

The consumer price inflation rate for essential daily necessities closely related to the lives of ordinary people has already exceeded 7% as of last month. This indicator surpasses the official consumer price inflation rate of 5.4% announced by the government by 2 percentage points, suggesting that the inflation felt directly by the public is rising much more steeply.

According to an analysis of Statistics Korea data on the 23rd, the consumer prices of major daily necessities and services that make up the 'MB Price Index,' which the Lee Myung-bak administration focused on managing for price stability for ordinary people in 2008, rose 7.4% last month compared to a year earlier.

The MB Price Index refers to the average price increase rate of 52 items selected by the Lee Myung-bak administration as targets for managing prices for ordinary people. It includes pork, mackerel, napa cabbage, green onions, flour, electricity charges, subway and city bus fares, among others. These items are mainly consumed by the bottom 40% income group and have a high price sensitivity, making the index a gauge of price trends for ordinary people.

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is delivering opening remarks at the 1st Real Estate Ministers' Meeting held at the Government Seoul Office in Jongno-gu, Seoul on the 21st. Photo by Hyunmin Kim kimhyun81@

First-Time Homebuyers Exempt from Acquisition Tax up to 2 Million Won

The government has decided to exempt acquisition tax up to a limit of 2 million won without restrictions on housing price or annual income for those buying a house for the first time in their life. A fundamental reform plan including a reduction in comprehensive real estate tax (Comprehensive Property Tax) rates is also scheduled to be announced next month.

According to the Ministry of Economy and Finance, the Ministry of the Interior and Safety, and related agencies on the 21st, anyone purchasing a home for the first time will be exempt from acquisition tax going forward. However, to alleviate the local fiscal burden caused by the reduction in local acquisition tax revenue and to prevent excessive benefits for high-priced homes, the exemption limit is capped at 2 million won.

Specifically, until now, acquisition tax was only reduced for households with an annual income of 70 million won or less (combined for couples) purchasing their first home priced at 400 million won or less in the metropolitan area or 300 million won or less outside the metropolitan area. Going forward, this income restriction will be removed. Also, the housing price limit condition, which previously allowed only a 50% reduction if the housing price exceeded 150 million won, has been abolished due to criticisms that it had lost effectiveness amid the recent surge in housing prices.

Deputy Prime Minister Choo Kyung-ho: "KEPCO's Self-Rescue Plan Insufficient... Aim to Conclude Electricity Rates as Soon as Possible"

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho said on the 20th that the decision on whether to raise electricity rates for the third quarter, scheduled for the 21st, was delayed because "there are insufficient parts in KEPCO's self-rescue plan, and further consultations among the Ministry of Trade, Industry and Energy, the Ministry of Economy and Finance, and KEPCO are needed."

Choo told reporters at the government complex in Sejong, "We aim to reach a conclusion as soon as possible and establish the government's position on electricity rates."

He explained, "Regarding the electricity rate increase, there are accumulated factors such as KEPCO's management issues and recent rapid cost increases. Since electricity rates are directly related to the public burden, KEPCO should have initially proposed various plans at a level acceptable to the public, but there are shortcomings." He added, "We are currently discussing additional self-rescue efforts beyond the current electricity rate level, and the height or low of the rate will be discussed together with related ministries."

Trade Deficit of 7.6 Billion Dollars from June 1 to 20

Amid growing concerns about a global economic recession due to rapid inflation worldwide, abnormal signals are also being detected in domestic exports. Exports of major domestic items such as passenger cars and auto parts decreased by 3.4% compared to the same period last year from the beginning of this month to the 20th.

Some are worried that this year’s trade balance may turn into a deficit for the first time in 14 years since 2008 due to the 'three highs' phenomenon of raw materials, exchange rates, and interest rates.

According to the Korea Customs Service on the 21st, the export amount (provisional customs clearance basis) from June 1 to 20 was 31.283 billion dollars, down 3.4% from the same period last year. This is the first time in about four months since February 1-10 of this year, which included the Lunar New Year holiday, that exports have decreased compared to the previous year. The number of working days during this period was 13.5 days, two days fewer than the 15.5 days in the same period last year. However, the average daily export amount, considering this, increased by 11.0%.