Time to embrace possible Korea-US interest rate gap reversal: experts

The Korea Times

The Korea Times

Finance

Sun, October 1, 2023 | 04:59

Economy

Time to embrace possible Korea-US interest rate gap reversal: experts

Posted : 2022-06-13 16:26

Updated : 2022-06-13 19:53

Meat products are seen on display at a grocery store in New York City, Friday, when the U.S. Department of Labor announced consumer inflation rose to a new 40-year high of 8.6 percent in May. AFP-Yonhap

By Yi Whan-woo

As 40-year-high inflation in the United States is fueling bets on the U.S. Federal Reserve's sharper-than-expected hike in its benchmark interest rate, the possibility of a reversal of the interest rate gap between the U.S. and Korea is higher than ever.

Experts urge Korea to embrace that possibility gradually rather than taking excessive countermeasures to prevent it from happening.

In the case of an interest rate reversal, the U.S. would have a higher rate than Korea. This is feared to spark an exodus of capital from Seoul and the Bank of Korea's (BOK) latest base rate hike was seen as necessary to be in tandem with that of the U.S.

"The soaring U.S. inflation is largely being affected by the prolonged war between Russia and Ukraine, which pushes the prices of energy and food upward. And inflation is likely to grow as no one knows for sure when the war will end," said Seo Jeong-hun, a senior researcher at Hana Bank.

He was referring to U.S. consumer prices rising by 8.6 percent in May from a year earlier ― marking the biggest jump since 1981 ― according to data released by the U.S. Department of Labor, Friday.

Following a 50-basis-point hike in May, the Fed promised another such hike in its next rate-setting meetings in June and July.

However, it is expected that a 75-basis-point hike is also on the table now, with no letup of U.S. inflation in sight.

"We believe that today's inflation data … is a game changer that will force the Fed to switch to a higher gear and front-load policy tightening," said Aneta Markowska, the chief financial economist at U.S. investment banking company Jefferies, Friday.

Markowska was one of the economists who forecast a 0.75-percentage-point increase at the Fed's meeting scheduled from Tuesday to Wednesday (local time).

Seo said it should not be ruled out that the U.S. interest rate could exceed Korea's, "at least temporarily within this year, if the BOK decides to take a breather," after delivering five pandemic-era hikes since August 2021.

Korea's policy rate currently stands at 1.75 percent, up to 1 percent higher than the U.S.'

After taking office in April, BOK Governor Rhee Chang-yong has said repeatedly the interest rate gap between the two countries could be reversed and that Korea should be ready to withstand the negative effects.

Jung Kyu-chul, a senior economist at the state-run think tank Korea Development Institute (KDI), said such a reversal "should be taken for granted at some point."

"It will be tough for Korea to take corresponding measures whenever the U.S. raises its key interest rate," he said, adding that the U.S. finds it "relatively more urgent" to tackle inflation.

He put aside concerns over an exodus of foreign capital, arguing, "It can happen but will not be too huge as feared by the market."

yistory@koreatimes.co.kr