West News Wire: The level of inflation in South Korea reached its highest level in more than 20 years last month, adding to signs of growing pressure on the country’s open, trade-dependent economy and fueling expectations of a significant rate increase by the central bank.

Data revealed on Tuesday that the consumer price index increased by a higher-than-expected 6% over the previous year in June, the highest rate since November 1998, while other data revealed the largest decline in foreign exchange reserves since late 2008.

Due to significant improvements in its international balance of payments and debt profile, economists and market experts ruled out any immediate risk of Asia’s fourth-largest economy experiencing a crisis, as it has in the past.

But some warned the government and the central bank were facing a difficult period.

“Policymaking will become all the more difficult as they have a mix of upside inflation risks and downside economic growth risks continuing for the time being,” said Park Seok-gil, an analyst at JPMorgan Chase Bank.

The high inflation reading did reinforce the case for the central bank’s increase of the policy interest rate by unprecedented 50 basis points at its meeting next week.

South Korea’s vulnerability to external shocks, given its heavy reliance on foreign trade and cross-border capital flows, has seen it come under pressure with rising fund outflows from the local stock market and the falling value of the won.

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

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Local financial markets showed no sign of panicking on Tuesday, with the perception that problems facing the country were mostly from abroad and a global trend. Stock, bond and currency markets all posted small gains.

Still, pressure is building over the government of conservative President Yoon Seok-yeol, who started work just two months ago and has yet to provide a broad policy blueprint on how to make a difference from his liberal predecessor.

President Yoon has ordered a reform of the public sector, calling for the selloff of idle assets and savings in expenditure, while promising that he would preside over an emergency meeting on the economy every week.

Since Yoon took office, the central bank has been selling dollars to tame the won currency’s plunge to the weakest since the 2008-09 global financial crisis from unnerving investors while at the same time dealing with sustained capital outflows from the stock market.

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