Fed's earlier-than-expected rate hike rekindles preference for safe assets

From left are Bank of Korea Governor Lee Ju-yeol and U.S. Federal Reserve Chair Jerome Powell. AP-Yonhap

By Lee Min-hyung

The United States Federal Reserve's reported plan to bring forward interest rate hikes will rekindle appetites for safe assets, weakening the valuations of Korea's local currency and KOSPI-listed stocks, analysts said.

Earlier expectations were that the Fed would increase its key rate sometime late in the first half of 2022. But there stands a growing likelihood for the authority to do so as early as March, soon after it ends the tapering of its bond-buying campaign.

Fed Chair Jerome Powell also hinted at the possibility, saying that it does not require much time lag between the end of tapering and the rate hike due to the increasing risk of inflation there.

The outlook will help safe assets continue to gain momentum for a robust rally, as they had been seeing throughout 2021 when the won-dollar exchange rate surged by around 10 percent. The benchmark KOSPI also closed with a lukewarm performance on the last trading day of 2021, when the main bourse finished at 2,977.65 points, up merely 33 points from the beginning of that year.

The outflow of foreign capital drove the rise of the exchange rate and the sluggish stock results last year.

Economists said the preference for safe assets would continue this year because of the accelerated pace of monetary normalization from the world's largest economy and Korea.

“Our forecast is that the dollar will be under upward pressure in the foreign exchange market throughout 2022, as the Fed is expected to accelerate its pace of monetary normalization by pushing for earlier rate hikes despite lingering risks on the spread of the Omicron variant of the COVID-19 pandemic,” KB Financial Group Research Institute economist Lee Seung-hoon said.

“We expect the Bank of Korea (BOK) to increase its key rates this year, but this will only slow down the pace of the rise in the exchange rate, rather than driving it down,” he said.

The Korean stock market extended its rally until the first half of 2021 by peaking at a record high of 3,316.08 points in June. But it has since lost its upward momentum amid the resurgence of the pandemic and lingering uncertainties surrounding when the Fed and the BOK will enter the cycle of monetary tightening.

But market analysts reached a consensus that this will not be the case this year when both monetary authorities will clearly walk on the same path for rate hikes despite the pandemic factor.

“We expect the Fed to speed up the pace of its monetary tightening by normalizing its monetary policies this year, even if our forecast is that the Fed's first rate hike will be made in July,” eBest Investment & Securities analyst Woo Hye-young said.

The analyst also said the BOK would be also be under growing pressure to raise the key rate further in the first quarter of 2022 due to lingering inflation woes here.

“Korea's 2021 annual consumer price inflation reached 2.5 percent, and the higher-than-expected price level will push the central bank to increase the key rate.”

According to minutes from the BOK's recent monetary board meeting, five out of six board members ― excluding Governor Lee Ju-yeol ― voted in favor of a rate hike last Nov. 25.

“There is a greater need for the BOK to reduce the level of our monetary easing further,” a member of the board said, adding that the central bank should carefully consider various factors ― such as the pandemic and financial inequality.