By: Dr. Mike Campbell
South Korea is Asia’s fourth largest economy after China, Japan and India. Before the global financial storm of 2007, the South Korean currency, the Won, was trading at roughly 1200 KRW to the Euro.
During the worst of the storm, this rate fell to 1993 KRW to the Euro and is trading today at the 1564.8 mark. A minor spat has emerged between Japan and South Korea with each accusing the other of manipulating their currencies to depreciate them against other major currencies to help their export markets.
Japan and South Korea both describe their own interventions in the markets as being designed to “reduce volatility”, or help to stabilise the rate. This is the first skirmish in what the IMF have referred to as a potential currency war which might involve other nations and lead to turmoil on world currency markets.
South Korea responded to the global financial crisis by reducing their central bank lending rate to 2% (amongst other measures). The rate was held at this level for 17 months and only raised to 2.25% in July 2010. Analysts had expected that the bank would increase the rate to 2.5% when it met yesterday, but the decision was taken to keep it unchanged.
The bank’s reasoning was explained in a statement from the Bank of Korea monetary policy committee: "Looking ahead, there exists the possibility of the heightened volatility of economic activity and exchange rates in major countries acting as a risk factor for the global economy."
They concluded that now was not the right time to make borrowing more expensive. Banks often use interest rates as a mechanism to control inflationary pressure and prevent an economy from “over heating”.