1%p difference in interest rates to 3% in South Korea and 4% in the U.S.
When additional interest rates rise due to shock of oil prices and weak inflation of the won
Government’s weight in November, increased volatility in the government bond market
ėŽė§ íë Deputy Prime Minister and Minister of Finance and Economy Koo Yoon-chul is attending the expanded macroeconomic and financial conference held at the Seoul Government Complex in Jongno-gu, Seoul on the 17th. From left, Bank of Korea Governor Shin Hyun-song, Financial Services Commission Chairman Lee Eok-won, Financial Supervisory Service Director Lee Chan-jin, and Deputy Prime Minister Koo. (Photo = Courtesy of the Ministry of Finance and Economy)
As the U.S. Federal Reserve (Fed) raised interest rates, the gap between the top U.S. policy rate (4%) and the Korean benchmark interest rate (3%) widened again to 1 percentage point.
The government cautioned against an expanded interpretation, saying, “The impact of the Fed’s rate hike on the domestic financial market is limited right now.” However, as the U.S. even hinted at the possibility of a further hike, the Bank of Korea’s pressure to raise interest rates has increased. Concerns over inflation are always present due to the combination of downward pressure on won prices and high oil prices due to the widening interest rate gap between Korea and the United States, and instability in housing prices in the Seoul metropolitan area is also cited as a factor that encourages interest rate hikes.
Real economic indicators are also increasing demand-side price pressures. Nominal gross domestic product (GDP) grew 26.4% year-on-year in the second quarter, the highest growth in 47 years since 27.7% in the third quarter of 1979. At a meeting to check the price situation on the 2nd, the Bank of Korea predicted that consumer price growth in September will continue to rise, focusing on core items, and cautioned against the possibility that high growth due to semiconductor specialties will stimulate prices.
As a result, the importance of exchange rates and financial market conditions has increased in the Monetary Policy Committee’s decision on the benchmark interest rate to be held next month. This is because if the won’s strength, which has offset the impact of oil prices, is dampened, inflationary pressure may increase and the time when the benchmark interest rate rises to 3.25% could be accelerated.
However, if the Monetary Policy Committee actually makes an additional increase, it is widely expected that November will be the most likely time. This is because it is highly likely to check the ripple effect for the time being as it has taken preemptive measures with consecutive hikes in July and August. Earlier, the Monetary Policy Committee deleted the phrase, “We believe that future monetary policy needs to continue the trend of raising interest rates,” suggesting a pace adjustment for the time being.
Meanwhile, after the U.S. Federal Open Market Committee (FOMC) decided to raise interest rates early in the morning, Deputy Prime Minister and Finance Minister Koo Yoon-chul held a joint “Expanding Macroeconomic Finance Conference” with related agencies to examine global financial market trends and the impact of the Middle East war on domestic financial and foreign exchange markets. The meeting was attended by so-called “F4,” including Bank of Korea Governor Shin Hyun-song, Financial Services Commission Chairman Lee Eok-won, and Financial Supervisory Service Director Lee Chan-jin.
Participants assessed that the Fed raised policy rates in consideration of solid economic and employment conditions, high price levels, recent rise in international oil prices and increased geopolitical uncertainty. As the increase has already been largely reflected in the market and the financial market is generally stable, the impact on the domestic financial market is expected to be limited.
However, as the Fed has further strengthened its commitment to stabilize prices and there is a possibility of additional interest rate hikes within this year, it has decided to keep a close eye on monetary policy decisions by the Bank of Japan (BOJ) and the Bank of England (BOE) scheduled for this week.
At the meeting, the volatility of the government bond market is increasing due to changes in internal and external conditions, such as the Fed’s recent policy rate hike. Participants decided to closely monitor government bond market trends as such uncertainties are likely to continue for the time being. In particular, if the market concentration becomes excessive, the government plans to make every effort to stabilize the government bond market by implementing necessary market stabilization measures.