Bank of Korea and Government: "FOMC Hawkish"... Korean Interest Rate Hike Gains Momentum (Comprehensive Report 2)

JP Morgan "Some Fed officials likely to support rate hikes in July-August"
Sharp rise in KRW-USD exchange rate amid strong US dollar

Lee Seung-heon, Deputy Governor of the Bank of Korea (left), and Lee Ok-won, First Vice Minister of Strategy and Finance (right) [Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol, Sejong= Reporter Son Seon-hee] The Bank of Korea evaluated the results of the U.S. Federal Open Market Committee (FOMC) discussions as "more hawkish (favoring monetary tightening) than expected." The government also described the outcome as "hawkish," reflecting market reactions, and there is growing interpretation that the Bank of Korea's rate hikes could accelerate as the U.S. advances its monetary tightening timeline. Some predict that at next month's Monetary Policy Committee meeting, some members may express opinions in favor of a "rate hike."

The Bank of Korea held a "Monetary and Financial Measures Task Force" meeting on the morning of the 17th, immediately after the U.S. FOMC meeting, chaired by Deputy Governor Lee Seung-heon. Deputy Governor Lee stated at the meeting, "The FOMC results are assessed to be somewhat more hawkish than expected," adding, "In international financial markets, U.S. long-term interest rates rose significantly, stock prices fell, and the U.S. dollar strengthened."

Although the Fed kept the policy rate unchanged and maintained the scale of asset purchases, the timing of rate hikes was moved forward by one year. Deputy Governor Lee said, "There is a possibility of increased volatility in domestic and international financial markets going forward," and added, "We plan to strengthen monitoring of market instability factors, continuously review response measures, and implement market stabilization measures if necessary."

The market reaction was stronger than expected. Following the FOMC, the won-dollar exchange rate surged by 14.8 won at the start of the day, trading around 1,130 won. Despite extending the $60 billion Korea-U.S. currency swap until the end of this year overnight, the possibility of early tightening led to a stronger dollar, pushing up the won-dollar exchange rate.

The KOSPI index was trading at 3,257.80, down 20.88 points (0.64%) as of 9:15 a.m., while the KOSDAQ index recorded 997.42, down 1.07 points (0.11%) compared to the previous day.

The government stated that although the FOMC results are interpreted as somewhat hawkish, there is sufficient capacity to respond and stabilize the market. Lee Eok-won, First Vice Minister of Strategy and Finance, said at the macroeconomic and financial meeting held at the Bankers' Hall in Seoul, "Volatility in global financial markets has somewhat expanded, and our financial market may be partially affected," but added, "We need to respond with confidence in our economy, calmly and rationally." The government repeatedly emphasized Korea's capacity to respond, citing △solid fundamentals △external credibility △the largest-ever foreign exchange reserves as evidence. However, it also noted, "Uncertainty about the ripple effects remains if the actual monetary policy stance shifts," and stated, "We will closely monitor related trends and respond proactively and systematically."

The timing of the Bank of Korea's rate hikes is also expected to accelerate. The Bank of Korea has repeatedly expressed the position that it may raise the base rate within the year, considering financial stability issues such as rapid rises in real estate and stocks, as well as economic recovery. If the U.S. tightens earlier, the reasons for the Bank of Korea to raise rates become even stronger. Global investment bank JP Morgan indicated that minority opinions favoring rate hikes could emerge at the Bank of Korea's Monetary Policy Committee meetings in July or August.

This content was produced with the assistance of AI translation services.