Value context and insight. lkm@koreatimes.co.kr
BOK likely to freeze key rate this month
Koreaand U.S. key interest rates
By Lee Kyung-min
Stock market closes higher on eased rate hike concerns
The Bank of Korea (BOK) is likely to freeze its policy rate this month, as aided by the U.S. Federal Reserve’s less hawkish-than-expected stance overnight and subsequent reduced risk of a further rate gap between the two countries, Thursday.
The U.S. central bank’s rate-setting members held the key federal funds rate steady in a target range between 5.25 percent and 5.5 percent, Nov.1 (local time), about 2 percentage points higher than Korea’s 3.5 percent.
Any further widening in the already-significant gap will trigger sharp depreciation of Korea’s currency against the dollar and a capital outflow, a combination of dreaded development for the country bogged down by a rapid build-up of household debts and sustained high inflation over the past few months.
Experts say Korea will be able to shift to eased monetary steps in the latter half of next year, provided that the U.S. central bank puts a stop to the current contraction cycle, as indicated by long bond yield rises straining financial conditions.
Korea’s central bank will hold a rate-setting meeting, Nov. 30, to determine whether the sixth consecutive rate freeze last month will be extended.
Chief among the factors are looming fears of an economic recession, exacerbated by heightened project financing risks involving heavy borrowings by real estate developers. Also at play are continued rises both in household debt and prices of goods and services. Soaring global oil prices due to the war between Israel and Hamas will weigh on the resource-scarce country feeling an extended pinch from years of rising energy prices.
The BOK said in an Oct. 30 report that the pace of inflation inching down will be slower than expected due to the Middle East crisis.
“The timing of inflation moderating from the current pace will be delayed, due mostly to sustained elevated prices of oil and agricultural products,” it said.
BOK Governor Rhee Chang-yong said Wednesday that consumer price forecasts will have to undergo major revisions, depending on oil prices.
“We have anticipated that oil prices would hover around $84 (112,854 won) next year, but the figure exceeding $90 will prompt us to change a lot in our projection,” he said in a seminar co-hosted by the Korea Chamber of Commerce and Industry in Seoul.
His comments on price volatility of goods will add to the central bank’s judgment on whether the current neutral rate which the bank’s rate-setting committee considers restrictive should be tightened further to curb household debt.
Local analysts say the central bank will be able to begin easing the rate cycle in the latter half, but the U.S. Fed must make the first move.
“Inflation will dip to the central bank’s target range of 2 percent led by weakening consumer demand overall in the third quarter of next year,” Shinhan Securities analyst Ahn Jae-kyun said. “The central bank will then be able to lower policy rates twice in the remainder of the year.”
Hi Investment & Securities researcher Park Sang-hyun said U.S. market watchers largely agree that the Fed’s tightening cycle will end sometime in the first half, as inferred by comments on long bonds-oriented tighter financial conditions.
“Long-term bond yields stabilizing, driven by U.S. Treasury resolving supply-demand mismatch in the market, will help the Fed with shifting its longstanding hawkish stance with ease certain to unburden the BOK from closing the policy rate gap,” Park said.
Korea’s stock market ended higher, mostly on a recovery in investor sentiment. The main bourse KOSPI ended at 2,343.12, up 41.56 points or 1.81 percent from the previous session. The tech-heavy Kosdaq closed at 772.84, up 33.61 points or 4.55 percent from a day earlier.
Korean currency closed at 1,342.9 won against U.S. dollar, gaining 14.4 won from the previous day.