Korea-US interest rate gap expands to record high

The Korea Times

The Korea Times

Finance

Fri, December 8, 2023 | 19:42

Economy

Korea-US interest rate gap expands to record high

Posted : 2023-03-23 16:55

Updated : 2023-03-24 14:31

Finance minister warns of global market turmoil amid US banking crisis fears

By Lee Min-hyung

The interest rate gap between the Bank of Korea (BOK) and the U.S. Federal Reserve widened to a new high of 1.5 percentage points, Thursday, for the first time in almost 22 years, following the Fed's "unsurprisingly dovish" rate hike of 25 basis points.

The sequential collapse of U.S. financial institutions forced the Fed to turn to the less hawkish pivot. The Fed's benchmark rate rose to a range of 4.75 percent and 5 percent following the latest baby step. An earlier market consensus expected the Fed to take a big step of increasing the interest rate by 50 basis points before the world's largest economy was hit by the ongoing banking crisis which erupted earlier this month.

The BOK froze its key interest rate at 3.5 percent during its monetary policy meeting in February.

Korea's Finance Minister Choo Kyung-ho said his ministry will heighten vigilance against the global financial turmoil.

"While the global economy adapts to monetary tightening, we cannot rule out the possibility that global financial unrest recurs again ― just like the latest U.S. banking crisis," Choo said during an emergency meeting. "We will maintain high vigilance and pay special attention to the situation."

Finance Minister Choo Kyung-ho, second from left, talks with top economic and financial officials at an emergency economy meeting in downtown Seoul, Thursday. To his left is Financial Services Commission Chairman Kim Joo-hyun, and Bank of Korea Governor Rhee Chang-yong, to his right, and Financial Supervisory Service Governor Lee Bok-hyun, right. Yonhap

Korea to raise guard against market instability after Fed rate hike

2023-03-23 09:57 | Economy

The Fed's overnight decision came as a relief to the BOK in its upcoming rate-setting meeting. Fed Chair Jerome Powell reiterated his determination for price stabilization, with additional rate hikes if necessary. He said "rate cuts are not in our base case."

But economists expected the Korean central bank to keep its key rate unchanged at 3.5 percent, as uncertainties surrounding price stabilization have been cleared here to some extent following the Fed's baby step ― a sign indicating a near end to the ongoing rate hike cycle.

"If the Fed had taken a big step, this would have resulted in a delay of Korea's price stabilization due to the possibility of the strengthening dollar and the depreciation of the Korean won," Meritz Securities economist Lee Seung-hoon said.

"But the risk has been alleviated after the Fed's baby step, so my viewpoint is that the BOK will freeze its key rate at its monetary policy board meeting slated for April 11," he said.

U.S. Fed Chair Jerome Powell speaks during a press conference in Washington, D.C., Wednesday. AP-Yonhap

Regarding concerns over the reversal of the interest rate gap between the BOK and the Fed, the economist said the Korean economy is "not vulnerable" to the current rate gap level, although it expanded to the highest level since October 2000.

"The reversal of the interest rate gap between the two countries does not pose a serious threat to the Korean economy for the time being, as the cash flow of the local capital market is not seriously swayed by the rate gap reversal," he said. "Unlike Europe, the won-dollar exchange rate is influenced less by the reversal of the rate gap."

"The BOK's rate hike cycle will come to an end at 3.5 percent, even if there is a possibility of the Fed raising the key rate once again by 25 basis points," Lee said. "The Fed is also forecast to cut its key rate sometime around the fourth quarter of 2023."

Hwang Sei-woon, a researcher at the Korea Capital Market Institute, concurred on the likelihood of the BOK's rate freeze.

"The current level of the interest rate gap reversal does not come as serious pressure sparking foreign capital outflow here," he said. "Our view is that the Korean economy will not face any serious risks even if the reversal of the gap widens further to 1.75 percentage points."

But other economists left open the possibility that the BOK will increase its key rate further.

"Even if the reversal of the gap does not pose an imminent risk to the Korean economy, there stands a chance of a prolonged reversal of the gap, which the BOK should carefully monitor," Sung Tae-yoon, a professor of economics at Yonsei University, said.

Korea's financial markets did not react sensitively to the Fed's rate decision. The benchmark KOSPI ended with a slight gain of 0.31 percent at 2,424.48 points, Thursday. The won-dollar exchange rate dipped to 1,278.3 won per dollar, down 29.4 won from the previous trading day.

mhlee@koreatimes.co.kr