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| Dealers work at Hana Bank's headquarters in Seoul, Wednesday. Yonhap |
Korean financial market jolted by big step warning from Fed
By Lee Min-hyung
The Bank of Korea (BOK) has come under increasing pressure to hike the key rate again by 25 basis points next month, in a move to ease market turbulence amid the U.S. Federal Reserve's unwavering hawkish bias.
After Fed Chair Jerome Powell sent unexpectedly aggressive signals for additional rate hikes overnight, the outlook of the BOK taking another baby step has gotten clearer on growing concerns over the widening interest rate gap between the two countries.
This shattered the once-prevalent prediction that the ultimate level of Korea's key rate will be set at the current 3.5 percent. Even if Korea's consumer prices are showing signs of stabilization after falling to the 4 percent range increase in February for the first time in 10 months, the Fed's reviving hawkish rhetoric comes as a bigger burden to the BOK's rate decision, according to economists.
A market consensus is that the Fed will raise its benchmark rate by 50 basis points to a range of 5 percent to 5.25 percent during the upcoming rate-setting meeting this month. This will expand the key rate gap between the BOK and the Fed to 1.75 percentage points. This is the largest in 23 years since the figure reached 1.5 percentage points between May and October 2000.
Economists also expected the BOK to take another baby step in April on the longer-than-expected cycle of the Fed's monetary tightening.
"Another rate hike of the BOK seems to be in sight, as the Fed is displaying signs of extending its monetary tightening cycle with a more hawkish tone," said Kang Hyun-ju, an economist at the Korea Capital Market Institute. "The BOK will take comprehensive factors into account, such as the movement of the won-dollar exchange rate."
"BOK Governor Rhee Chang-yong also left open the possibility of the scenario, but it appears premature for the time being to predict the ultimate level of the key rate, as the economy here is still showing signs of instability due to weak exports of key items such as semiconductors," he said.
The remark reflected on Rhee's overnight comments that the central bank is not considering cutting the key rate anytime soon.
"Most of the BOK's monetary board members are taking a wait-and-see attitude over whether to keep raising the key rate or freezing it, after considering how multiple uncertainties such as the Fed's monetary policy, war between Russia and Ukraine, China's economic recovery and the housing market situation here unfold down the road," Rhee said Tuesday during a meeting with reporters.
He also said the BOK will keep a closer look at the widening interest rate gap with the Fed by "leaving open all the options."
"Our mission is to set monetary policies in an elaborate manner by bringing all the options to the table regarding the rate gap," he said.
Powell's remark also ended up rattling Korean financial markets Wednesday.
The benchmark KOSPI returned recent gains on weakening investor sentiment triggered by the hawkish Fed. The main bourse closed at 2,431.91, down 1.28 percent or 31.44 points from the previous trading day. Retail investors purchased local shares worth 942.2 billion won, but failed to offset a selling spree led by institutional and foreign investors.
The tech-savvy Kosdaq also dropped by 0.22 percent, but the secondary stock market fared slightly well on robust performance of major large-cap battery stocks.
The Korean won lost ground against the dollar on growing preference for safer assets. The won-dollar exchange rate closed at 1,321.4 won per dollar, up 22 won. This is the first time in a week that the figure exceeded 1,320 won.
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