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| Bank of Korea (BOK) Governor Rhee Chang-yong gives the opening speech during an international conference co-hosted by the BOK and the Korea Economic Association at The Westin Josun Seoul hotel in central Seoul, Friday. Yonhap |
Won gains 59.1 won per dollar, KOSPI soars 3.37% on cooling US inflation
By Yi Whan-woo
Bank of Korea (BOK) Governor Rhee Chang-yong hinted on Friday that the central bank will slow the pace of its monetary tightening by raising its key interest rate by a conventional margin of 0.25 percentage points in this year's final rate-setting meeting scheduled for Nov. 24.
His comment came on the heels of fresh U.S. economic data, Thursday, that consumer price inflation in the U.S. cooled down to an eight-month low of 7.7 percent in October after hitting a four-decade high of 9.1 percent in June.
High U.S. inflation has prompted the U.S. Federal Reserve to embrace a hawkish monetary policy which, subsequently, accelerated the BOK's rate hike, increased the refinancing burden among businesses here and turned Korean financial markets volatile for the past few months.
"Under the circumstances, prices and current exchange rates have somewhat stabilized recently and the speed of U.S. interest rate hikes is expected to be less rapid," Rhee said during an international conference co-hosted by the BOK and the Korea Economic Association in central Seoul.
He underlined that ensuring price stability and reducing inflation through monetary policy tightening remain the BOK's priorities.
But he also addressed that the BOK's rate increases this year have been fast and acknowledged the "growing signs of stress in various sectors, emphasizing the importance of maintaining financial stability, especially in nonbanking financial sectors.
"We are seeing signs of money moving from nonbanking sectors to the banking sector after deposit rates in banks significantly increased following policy rate hikes … How to recycle those flows back to nonbanking sectors is an important policy issue for the BOK," Rhee added.
Prior to Rhee's comment, Friday, the BOK was believed to be open to its 50-basis-point hike, following the previous ones in July and October.
That possibility has reduced likelihood, according to analysts, as eased U.S. inflation suggests the Fed's hawkish credit tightening is paying off and that it may not go for a fourth 75-basis-point rate hike as predicted for its upcoming monetary policy meeting planned for Dec. 12 and 13.
The Fed increased its policy rate by 0.75 percentage points for the fourth time, Nov. 2, raising its rate to a range of 3.75 percent to 4 percent as compared to Korea's current 3 percent.
The U.S.' interest rate surpassing Korea's was blamed for an outflow of foreign investment in search of safer haven assets and the plummeting stock market here.
"I don't think the Fed will go for its fifth 75-basis-point rate hike, meaning the BOK should not be too concerned about whether to take another 'big step' again to narrow the U.S.-Korea interest rate gap," said Joo Won, a senior economic researcher at Hyundai Research Institute.
Korea Investment & Securities economist Choi Jae-min speculated that U.S. inflation may cool down to 7.5 percent in November and may provide "an excuse for the Fed to back away from the 75-basis-point rate policy."
Asked about the impact of eased U.S. inflation on the Korean financial market, Joo speculated the Korean won will "gain ground" against the U.S. dollar in the next couple of weeks.
It closed at 1,318.4 won per dollar, Friday, up 59.1 won from the previous day's close, after staying in the mid- to upper-1,300 won range for past two days.
The Korean currency this week is comparable to the past several months during which it has been taking a beating against the dollar, even weakening below the psychological threshold level of 1,400 won.
The benchmark KOSPI gained 3.37 percent to close at 2,483.16 points, Friday.
It advanced for four days straight until Wednesday, over keen investor attention to the U.S. midterm elections results and U.S inflation, before retreating 0.91 percent to close at 2,402.23 points, Thursday.
Joo said it remains uncertain whether the stock market will turn bullish in relation to U.S. inflation. "The earnings and other factors will have much to do with the shares," he said.
