Yi Whan-woo is a Korea Times journalist primarily covering finance. He writes in-depth articles on macroeconomy and financial markets and previously covered sports, politics, diplomacy and inter-Korean affairs, among others. Feel free to contact him at yistory@koreatimes.co.kr.
Hawkish Fed stance to add more pressure to BOK's rate hike move
U.S. Federal Reserve Chair Jerome Powell, center, takes a coffee break with attendees of the Jackson Hole Economic Symposium in the U.S. state of Wyoming, Friday. Bank of Korea (BOK) Governor Rhee Chang-yong also attended the symposium of central bankers. AP-Yonhap
By Yi Whan-woo
BOK chief says it's difficult to end rate hikes earlier than Fed
By Yi Whan-woo
The Bank of Korea (BOK) is likely to face more pressure to pursue additional rate hikes throughout this year, after the head of the U.S. Federal Reserve reaffirmed his hawkish stance, Friday, to raise borrowing costs at a faster pace to fight inflation.
The BOK has been open to additional hikes, as signaled by Governor Rhee Chang-yong that the country's monetary policy will continue to focus on taming inflation after the base rate was raised for the fourth straight time to 2.5 percent, Thursday.
Under the circumstances, Fed Chair Jerome Powell warned, Friday, that interest rates will remain elevated for “some time.” The Fed took a rare “giant step” of delivering a 75-basis-point rate hike for the second consecutive month in July.
“The historical record cautions strongly against prematurely loosening policy,” Powell said on the sidelines of the Jackson Hole Economic Symposium of central bankers in the U.S. state of Wyoming. “We must keep at it until the job is done.”
He referred to U.S. inflation that accelerated to a 40-year high of 9.1 percent in June.
The pace of price rises slightly slowed to 8.5 percent in July, but signs of a relief remain uncertain.
Powell went on to say, “a single month's improvement falls far short of what (Fed policymakers) will need to see before we are confident that inflation is moving down,” stressing that a failure to curb prices would mean “far greater pain.”
Powell's comment comes after the Fed's minutes from the July rate-setting meeting were released in mid-August, in which officials committed themselves to rate hikes until they find compelling evidence that inflation is falling.
Such a hawkish stance increases the possibility of the U.S. policy rate, which currently remains in the range of 2.25 percent to 2.5 percent, becoming higher than Korea's.
The BOK has two rate-setting meetings remaining this year ― in October and November ― while the Fed has three more to come in September, November and December.
The BOK finds small, incremental increases appropriate, while the U.S. is believed to be open to a third “giant step” if necessary.
At the Jackson Hole meeting in the U.S., Sunday, BOK Governor Rhee Chang-yong hinted that the BOK will maintain a credit tightening mode longer than the Fed.
“We are now independent from the government, but we are not independent from the Fed,” Rhee said in a Reuters interview on the sidelines of the conference. “So if the Fed continues to increase the interest rate, it will have a depreciation pressure for our currency.”
“If the Fed continues to hike interest rates, it will further build pressure on the weakening of the Korean won. Taking into consideration the Fed's impact on our monetary policy and inflation, I don't think we will stop interest hikes earlier than the Fed,” he said.
Concerning the Korean economy, analysts say Powell's hawkish message and the BOK's possible additional rate hikes can further heighten economic risks.
They include a weakening Korean currency against the U.S. dollar, a surge in import prices, a widening trade deficit, the flight of foreign capital in search of safer haven assets, a plummeting stock market and growing household debt.
“Those risks certainly make the BOK feel more burden in balancing between inflation and growth in its rate policy,” said Joo Won, deputy director of the Hyundai Research Institute
Jun Sung-in, a Hongik University economics professor, warned that a rate hike in the future may affect consumer spending in the midst of a slowdown in exports.