Powell's remarks pushing Bank of Korea to delay rate hike

Federal Reserve Chairman Jerome Powell testifies on the Fed's response to the coronavirus pandemic during a House Oversight and Reform Select Subcommittee hearing on the coronavirus on Capitol Hill in Washington, D.C., Tuesday. AP-Yonhap

Timeline for BOK's rate hike relies on U.S. tapering: economists

By Lee Min-hyung

With U.S. Federal Reserve Chairman Jerome Powell toning down his recent hawkish rhetoric over his country's monetary policy, economists said Wednesday the timing of a rate hike by the Bank of Korea (BOK) will be dependent on actual U.S. tapering moves.

The prediction is in response to Powell's latest remarks, Tuesday (local time) that the Fed will not raise the key rate “preemptively” due to growing inflationary fears.

The message was delivered a few days after the Federal Open Market Committee (FOMC) turned hawkish last week when more of its members stressed the need to bring forward the timeline for a U.S. rate hike to 2022.

Given the BOK's monetary policy direction is still heavily reliant on the U.S. economy, Powell's remarks, interpreted by many as rather dovish, could serve as justification for the cenrtal bank to delay any rate hike decisions.

Following the latest BOK monetary policy board meeting last month, local economists predicted that the bank would raise the currently record-low benchmark rate at least once sometime in the fourth quarter of this year.

Experts said the BOK does not necessarily have to follow steps taken by the Fed as there is a certain degree of disparity over the post-pandemic economic recovery between the two countries.

“Powell's recent remarks appear to have the intention of minimizing the country's stock market shock following the FOMC's hawkish turn,” Yonsei University economist Sung Tae-yoon said. “The Korean economy will make progress in terms of face-to-face consumption in the latter half of the year, so my view is that the BOK does not have to follow in the footsteps of the Fed in its monetary policy.”

But he also did not leave out the possibility of the BOK carrying out an even earlier rate hike, as the economy remains vulnerable to inflationary fears.

“The central bank's future monetary stance will rely on how much the economy will be exposed to inflationary risks.”

Korea University economist Kim Jin-ill said the BOK's monetary policy should be adjusted in line with the timeline of the Fed's tapering.

“Powell's dovish messages are aimed at toning down the ultra-hawkish stance from the latest FOMC meeting,” said Kim who has worked at the Federal Reserve Board. “The timing for Korea's benchmark rate hike should be determined in line with the schedule of the Fed's possible tapering.”

Despite the FOMC's hawkish shift, the Fed remains conservative in making official comments on talks about the timing for reducing the size of its bond-buying programs.

The BOK cut its benchmark rate to a record low of 0.5 percent in May last year amid the unexpected economic difficulties stemming from the COVID-19 pandemic. The Fed is also expected to keep maintaining its near-zero key rate policy at least until the first half of 2022.

Right after the FOMC delivered its hawkish message last week, the market here expected the BOK's monetary policy board to push for a rate hike as early as October, which, if realized, will mark the first rate increase by the central bank since November 2018.

U.S. stocks closed higher on Powell's testimony before Congress. The Dow Jones Industrial Average rose 68 points, or 0.2 percent, to 33,945, Tuesday. The Nasdaq also closed up 0.79 percent at a record 14,253, on the rally of mega-cap tech stocks such as Amazon and Microsoft. The S&P 500 also jumped 0.51 percent to close at 4,246 the same day.

The benchmark KOSPI also rose 0.38 percent Wednesday to close at 3,276.19. The tech-savvy Kosdaq also finished with a gain of 0.48 percent at 1,016.46 the same day, as shown by data from the Korea Exchange (KRX), the country's bourse operator.