US Fed's hawkish hold strengthens case for BOK rate hike in July

Finance Minister Koo Yun-cheol, second from left, poses ahead of a market review meeting at Government Complex Seoul, Thursday. From left are Financial Supervisory Service Gov. Lee Chan-jin, Koo, Bank of Korea Gov. Shin Hyun-song and Financial Services Commission Chairman Lee Eog-weon. Yonhap

The U.S. Federal Reserve's hawkish signal has reinforced expectations that the Bank of Korea (BOK) will raise interest rates as early as next month, market observers said Thursday.

With inflation concerns persisting in both countries, monetary officials in Washington and Seoul are increasingly focused on restoring price stability, potentially marking the start of a renewed tightening cycle in both economies.

The Fed held its benchmark interest rate steady Wednesday (local time) in its first policy decision since Kevin Warsh became its chair. The U.S. central bank unanimously left the federal funds rate unchanged at 3.5 percent to 3.75 percent, marking its fourth consecutive pause.

The latest dot plot showed that nine of the 19 Federal Open Market Committee participants expected interest rates to be higher than current levels for the rest of this year. Warsh did not submit a rate projection.

The Fed's hawkish stance has added to pressure on the BOK to tighten its policy, as officials here seek to contain inflation and limit the impact of a wide interest rate gap with the United States.

Market watchers widely expect the central bank to raise its benchmark rate by 0.25 percentage points to 2.75 percent at its July 16 policy meeting. It would mark the bank's first rate increase since January 2023.

"We expect the BOK to raise its benchmark rate twice this year, in July and October, bringing the policy rate to 3 percent by year-end," said Ahn Ye-ha, an analyst at Kiwoom Securities.

"Although the Fed left rates unchanged, its hawkish message has increased pressure on the BOK to move toward tightening. Given the persistent inflationary pressures, the BOK could begin raising rates as early as July," said Kim Dae-jong, a professor of business administration at Sejong University.

Kim said Korean policymakers would likely pay closer attention to the interest rate gap with Washington and try to narrow it if the Fed begins tightening later this year.

U.S. Federal Reserve Chair Kevin Warsh speaks during a press conference in Washington, Wednesday (local time). AFP-Yonhap

BOK Gov. Shin Hyun-song has already signaled the need for a tighter monetary policy, with consumer inflation expected to remain around 3 percent throughout the second half of this year.

At a press briefing Wednesday, Shin said the central bank would "respond proactively" until it gains confidence that inflation is on track to return to its target level.

The remarks echoed comments made last week during the BOK's 76th anniversary ceremony, when Shin stressed the need to "raise interest rates in a timely manner with a focus on maintaining price stability."

Following the Fed's latest decision, Korea's top economic policymakers said U.S. monetary policy could move in a tighter direction than previously anticipated.

The assessment was made during a meeting Thursday morning attended by Finance Minister Koo Yun-cheol, Shin, Financial Services Commission Chairman Lee Eog-weon and Financial Supervisory Service Governor Lee Chan-jin.

According to the finance ministry, the officials agreed to closely monitor financial and foreign exchange markets amid growing uncertainty surrounding global monetary policy.

"We will remain vigilant and closely monitor market conditions, and take stabilization measures when necessary and in a timely manner," Koo said.