Fed's dovish stance gives BOK room to maneuver

A screen displays a statement by Federal Reserve Chair Jerome Powell, following the U.S. Federal Reserve's announcement and as traders work on the trading floor at New York Stock Exchange (NYSE) in New York City, Thursday (EST). Reuters-Yonhap

Fed's overnight decision was 'no surprise': BOK

By Lee Kyung-min

The Bank of Korea (BOK) will have room to maneuver in terms of adjusting its monetary policy, relieved by the Federal Reserve's decision to leave its key policy rate unchanged at 0 to 25 basis points with asset purchase programs intact.

The Fed's rate-setting decision and remarks from Fed Chairman Jerome Powell are considered the central considerations that will impact the BOK's rate-setting.

Despite the U.S.'s rate freeze, the BOK is still inclined to increase its benchmark policy rate, due to rising inflationary pressures, job losses and snowballing household debt, the combination of which fail to take priority over the U.S. policy action.

Senior BOK officials were called in for a hurriedly-arranged meeting to assess impact of the Fed's overnight decision on the country's economy. BOK Deputy Governor Lee Seung-hun said Thursday that the latest FOMC meeting was “no surprise,” as was widely expected. But the bank stressed that the spread of the Delta variant would pose a major threat to recovery path of the country.

“Apart from the expected risk factors, the pandemic-triggered financial market volatility will be monitored more closely,” he said.

First Vice Finance Minister Lee Eog-weon also said that more sophisticated management is needed to reduce risk factors including the possibility of the U.S. tapering and surging debt-induced financial imbalances that could hamper Korea's economic recovery.

“The second supplementary budget passed the National Assembly last week. The government will make every effort to bring the pandemic under control,” he said at a meeting with senior financial regulators and economic policymakers early in the day.

BOK Governor Lee Ju-yeol said that the bank will try to normalize its monetary policy, saying that the bank's rate increases will come once or twice with 25 basis points each time, if they happen within this year.

Some say that the Fed has essentially signaled a countdown on tapering, as inferred by its Wednesday statement that said, “the economy has made progress toward” the goals of maximum employment and price stability. “Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain,” it added.

Seoul National University economist Lee In-ho said that whether the BOK decides on any rate hikes within this year will still hinge on the Fed's course of action.

“The country's financial market stability will be put at risk, if the Korean bank raises the key rate before the Fed does. It remains to be seen how things will unfold over the next few months.”