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Bank of Korea Governor Rhee Chang-yong, left, and U.S. Fed Chairman Jerome Powell. Yonhap |
Kospi exposed to downside risks amid Fed's hawkish gestures
By Lee Min-hyung
The Bank of Korea (BOK) is under pressure to take a big rate hike of 50 basis points during the upcoming rate-setting meeting in mid-July, after the U.S. Fed decided on the "giant step" of increasing its benchmark rate by 0.75 percentage point.
BOK Governor Rhee Chang-yong also left open the possibility of taking the unprecedented big step, saying that the central bank will "play it by ear."
"We have three to four weeks to go until the next monetary policy board meeting, so we will decide (on the level of the next rate hike) after taking into consideration the response from the market," Rhee said during an emergency macroeconomic meeting, Thursday.
But the market expected the Korean central bank to push for the 50-basis-point rate hike soon in tandem with the Fed's ever more hawkish moves. Fed Chairman Jerome Powell also hinted at the possibility of raising its key rate by 75 basis points once again during its next meeting.
In response, overseas investment banks revised up Korea's year-end rate projection.
"We now expect a faster hike cycle, with a 50-basis-point hike in July and a 25-basis-point additional hike in the fourth quarter, and the key rate to rise to 3 percent by the year-end," said JPMorgan economist Park Seok-gil.
The economist cited growing inflationary pressure here as the core reason behind the central bank's more hawkish turn throughout this year. Korea's consumer prices soared by 5.4 percent in May from a year ago, the highest growth in more than 13 years.
"While some members (from the BOK's monetary policy committee) were likely seeing balanced risk around the staff's inflation forecast and had concerns over growth momentum, the majority likely shared a view that inflation's upside risk is greater," he said. "As a result, the minutes clearly suggest that the committee will focus on inflation risk at coming meetings."
Goldman Sachs also projected the Korean central bank to remain more hawkish in its monetary policy this year as a reflection of the Fed's aggressive monetary stance and growing inflationary pressure here and abroad.
"In light of the acceleration in monetary tightening in major central banks, we add 25 basis points to our terminal rate forecast to 2.75 percent from 2.5 percent and bring forward the timing of reaching the peak level to November of this year from the second quarter of next year, through a 25-basis-point hike each at the remaining four monetary policy committee meetings in July, August, October and November," Goldman Sachs economist Kwon Goo-hoon said.
Wall Street recovered from the overnight rate hike by the Fed. Korea's benchmark Kospi also closed with a slight gain of 0.16 of a percent on Thursday.
But market analysts argued that it is premature to say whether the giant step from the Fed will be able to generate tangible effects in taming inflation.
"It is questionable how long the effects of the Fed's recent giant step will last, even if the latest decision helped temporarily alleviate fears about inflation and rate hikes from the market," Hi Investment & Securities analyst Park Sang-hyun said.
"Actual signals indicating a slowdown of upward inflationary pressure should be found to calm the ongoing turbulence on the financial market here and abroad," he added.