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.
Korean economy forecast to weather Fed's tightening of monetary policy
Electronic signboards in a Hana Bank dealing room in Seoul show the Korean currency closing at 1,214.30 won per dollar on Thursday, up 21.4 won from the previous session. Yonhap
By Yi Whan-woo
Economists say US rate hike, Wednesday, was within market expectation
By Yi Whan-woo
The Korean economy can weather the latest U.S. interest rate hike for the time being, as the country has been embracing measures to absorb any possible resulting shocks that had been predicted, according to officials and analysts, Thursday.
They assessed the Federal Reserve's quarter-percentage-point increase of benchmark interest rate, Wednesday, removes one of risks that complicated global economic uncertainties, such as the war in Ukraine and Russia's looming debt default.
The Bank of Korea (BOK), however, is urged to better cope with Fed's tightening monetary policy in the long term, as witnessed from its chair Jerome Powell who signaled the possibility of up to six additional rate hikes this year for the first time in more than three years.
Powell has been known for his hawkish stance. Still, his approach to bring the benchmark rate to about 1.9 percent by year-end is seen to be somewhat more aggressive than analysts had expected.
“The Fed's latest decision corresponds to the market predictions,” Vice Minister of Economy and Finance Lee Eog-weon said while presiding over a regular macroeconomic and financial meeting in Seoul.
He cited the rising stock market, weakening of the dollar and other elements of the international financial market that remained steady overnight after the Fed's hike.
He noted Korea's base rate is back to the pre-pandemic level at 1.25 percent, following the BOK's three consecutive rate hikes from August 2021 to January this year.
“Against this backdrop, the U.S. rate hike will have limited impact on the domestic financial market, especially considering our economic fundamentals and credit ratings, Lee added.
In a separate meeting, the BOK deputy governor voiced a similar view. “The Fed's hike is within expectations and its impact on international markets remains limited,” he said.
Sung Tae-yoong, a Yonsei University economics professor, agreed on the U.S. interest hike having little impact on the Korean economy.
But, he speculated the BOK may be pressed to raise the interest rates “in a hurry,” if inflation is exacerbated.
“Taking this into account, the possible absence of the BOK governor will pose a problem for the central bank to take the initiative in monetary policy and respond to the situation in a prompt manner,” he said.
He referred to BOK Governor Lee Ju-yeol's tenure ending at the end of this month and no agreement in place yet between the outgoing President Moon Jae-in and President-elect Yoon Suk-yeol regarding who will succeed Lee.
It is thus anticipated the BOK will make a decision on base rate without its chief in its next monetary board meeting scheduled on April 14.
In relation to the stock market, analysts assessed that the Fed's rate hike removed uncertainties in relation to U.S. monetary policy and may prompt a market rally.
The benchmark KOSPI rebounded to the 2,700-point level, Thursday, for the first time in nearly two weeks. It closed at 2,694.51, up 1.33 percent from the previous day.
“The Fed's announcement was more hawkish than expected, but even so, its latest hike should be attributed to sorting out market concerns,” said Han Ji-young, an analyst at Kiwoom Securities.
Suh Sang-young, an analyst at Mirae Asset Securities, forecasted the domestic stock market to stabilize after taking a beating in general this year.
“Of course, the Fed's move to raise the base rate six times more this year will be burdensome, but considering the U.S. economy is recovering and the Fed's move was within expectation, the stock market hopefully can cope with the situation,” Suh said.
The local currency, after sinking to 1,240 won against the dollar for the first time in nearly two years during intraday trading on Monday, gained 21.4 won to close at 1,214.3 won, Thursday.
Kim Seung-hyuk, a foreign-exchange analyst at NH Futures, projected the won-dollar exchange rate to recover “thanks to Fed uncertainties being cleared and the possibility of a peaceful resolution to the Ukraine crisis.”
Kim accordingly viewed the local currency may recover and reach the 1,210 won level soon.