Is the High Exchange Rate the Fault of 'Seohak Ants'? MPC Member Kim Joungho Says "Rational Actions Under Own Responsibility"

Overseas Securities Investments by Individuals and Other Economic Agents Lead to High Exchange Rate
From an Analytical Perspective, Foreign Exchange Authorities Need to Consider Supply and Demand Improvements Amid These Trends
Impact of Exchange Rate on Inflation Is Also a Concern Within the Monetary Policy Committee

"All economic agents act rationally and take risks at their own responsibility. However, overseas securities investments by individuals and other economic agents have ultimately led to a high exchange rate. The foreign exchange authorities need to consider countermeasures for the results that have emerged. Please understand that this is not about blaming any particular group, but rather a concern arising from these trends."

Kim Joungho, a member of the Monetary Policy Committee of the Bank of Korea, is speaking at a press conference held on the 10th at the Bank of Korea in Jung-gu, Seoul. Bank of Korea

Kim Joungho, a member of the Monetary Policy Committee of the Bank of Korea, made these remarks at a press conference held at the Bank of Korea in Jung-gu, Seoul, on the 10th, in response to a question about the view that the recent high exchange rate is due to "Seohak Ants"-individual investors seeking high returns through overseas stock investments.

Kim explained, "Many factors affect the exchange rate, such as relative price differences, growth rate differences, and interest rate differences, but in the short term, supply and demand have a significant impact. While foreign exchange demand comes from companies and other entities, recently, economic agents such as the National Pension Service, asset management firms, and individuals have increased their demand by investing in overseas stocks or bonds with relatively higher returns. According to a Bank of Korea survey, about two-thirds of the recent increase in the exchange rate is attributable to supply and demand factors."

He continued, "This is not about blaming any particular group, but rather, when analyzing the factors influencing the exchange rate, supply and demand account for a significant portion. From the perspective of the overall economy, this leads to (sectoral) differential impacts from a high exchange rate and results in negative effects on economic policy." He emphasized that, in light of these unintended consequences, the foreign exchange authorities need to consider ways to improve supply and demand.

When asked whether communication with the market was clear following last month's Monetary Policy Committee decision on the base rate, he said, "It is difficult to meet everyone's expectations, but I believe we delivered a message to the market at a neutral level." Regarding the fact that the six committee members were split 3-to-3 between maintaining and lowering the rate in their outlook for the next three months, Kim explained, "Those who left open the possibility of a rate cut emphasized that the upside and downside risks to next year's growth remain, and that, excluding the IT sector, the growth rate is as low as 1.4 percent, making it difficult to see it as clear growth. Those who left open the possibility of maintaining the current rate pointed out that the growth rate itself has been revised upward to the level of potential growth, inflation forecasts have slightly exceeded expectations, and that it is still necessary to monitor financial stability issues such as real estate, household debt, and the exchange rate."

He added, "Market participants have their own views, and some may have acted quickly on the expectation that 'the Bank of Korea could end the rate-cut cycle in the near future,' while the opposite also occurred."

Lee Chang-yong, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee meeting held at the Bank of Korea headquarters in Jung-gu, Seoul, on the 27th of last month. Photo by Yonhap News

Regarding the assessment that the previous day's 1.5 trillion won outright purchase had only a limited impact, he explained, "Coincidentally, issues related to the Reserve Bank of Australia and the European Central Bank (ECB) emerged the previous day, signaling a preference for monetary tightening. This led to speculation in the market about a possible change in the interest rate cycle. However, the outright purchase was conducted because 24 trillion won worth of government bonds matured that day, and it was necessary to secure securities for sale in repurchase agreements (RPs)."

He emphasized that the Bank of Korea's quarterly outlook is helping the Monetary Policy Committee in its decision-making process. Kim noted, "When the quarterly outlook was first introduced, uncertainty happened to increase. Forecasts can be wrong not only for the Bank of Korea but also for other institutions if conditions change." Regarding the recent increase in the money supply, he explained that it is similar to the average during easing cycles and is the result of funds flowing into linked investment trusts as the stock market has performed well.

However, he stressed that all committee members are focused on price stability, which is a key objective of monetary policy. Kim said, "Despite the recent rise in consumer prices, the annual outlook is expected to remain stable near the target (2.0 percent) for both this year and next year. However, the committee is still considering the impact the exchange rate may have on inflation."

He also said that communication between the Bank of Korea and the government is sometimes necessary to share perceptions of the economic situation and coordinate policy. However, he emphasized that decisions on policy instruments should be made independently and that communication is carried out with this in mind.