ED Rate hikes stoke concerns

Time to find breakthrough to possible economic recession

The nation's financial authorities are desperately coping with a potential increase in financial market volatility following the U.S. Federal Reserve's 75 basis point rate hike Wednesday. The Fed's recent move raised the benchmark interest rate to a 15-year high ― from 3.75 percent to 4 percent. The four consecutive giant rate hikes have largely been expected, pushing the U.S. benchmark rate 1 percentage point higher than South Korea's.

Chair Jerome Powell indicated that the Fed will keep raising the benchmark rate, contrary to previous market expectations. “We think we have a ways to go” to tame inflation, he said. Global investment banks forecast the U.S. will continue to increase the benchmark rate to 5.5 percent. Despite the consecutive rate hikes, however, soaring commodity prices are showing no signs of abating both here and in the U.S.

The nation's consumer prices rose 5.7 percent in October from a year earlier, according to data released on Nov. 2, while U.S. consumer prices also went up 8.2 percent in September. The rate hikes are further strengthening the U.S. dollar, and depreciating the Korean won against the greenback. The exchange rate, which stood at 1,188.8 won per dollar at the end of last year, rose 19.8 percent to reach 1,423 won as of Nov. 3. Such a steady appreciation of the U.S. dollar has also increased import prices.

Against this backdrop, the values of assets, such as property and stocks, have continued to decline. According to the Korea Real Estate Board Thursday, the prices of apartments nationwide fell 0.32 percent in the first week of November, from a week earlier, marking the sharpest drop since the organization began tallying such data. The additional rate hikes will further accelerate the drop in apartment prices.

Furthermore, business confidence has deteriorated amid a lingering credit default, triggered by a state-backed developer's failure to pay off bonds, impacting the short-term money markets. Concerns over a credit strain have also been growing since Heungkuk Life Insurance decided to delay buying back $500 million of its dollar-dominated perpetual bonds. This has also negatively impacted domestic companies' bids to borrow foreign capital.

The widening interest gap between Korea and the U.S. is stoking concerns over the possible outflow of capital by foreign investors. The Bank of Korea (BOK) plans to hold a Monetary Policy Board meeting on Nov. 24, to determine the key rate. The board members are expected to raise the rate in line with the U.S.' additional hike.

Yet, they also need to consider the growing financial burden on individuals and a possible economic recession in case of a drastic hike, coupled with the possible financial crunch for businesses. They also need to pay particular attention to the less privileged who are more vulnerable to the prospect of rate hikes.

Many nations are suffering from weakening currencies due to the U.S.' move to raise the benchmark rate. But the U.S. is not worrying about other countries despite its status and responsibility as a key currency nation. It is not easy to expect inter-state policy coordination experienced during the global financial crisis. We need to acknowledge the current trend of rate hikes will likely continue for a while and take suitable precautions to tackle the looming challenges.