Since the year 2000, the South Korean Won has appreciated over 35% against the USD, bedeviling South Korea’s economy, which is heavily dependent on exports to drive growth. Through the currency’s multi-year run, the Central Bank has fought to restrain its appreciation, but to no avail. Perhaps the Central Bank is misguided in its efforts. It seems South Korea’s Central Bank has spent too much time intervening in foreign exchange markets and not enough time conducting monetary policy. Economists argue it should focus on growing the economy, which is now struggling to achieve 5% annual growth, by promoting domestic demand. Most economists also agree interest rates are too high. The Bank of Korea, though, is afraid of lowering them for fear of spawning a domestic real estate bubble and triggering capital outflows. The Economist reports:

So with demand and confidence still weak, further cuts in official interest rates, now 3.25%, would make sense. But the central bank is holding rates…for the seventh month running. Many onlookers think it will keep rates steady while it pursues other objectives that have little to do with economic stability.

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