Numerous Variables Including US Tapering and Household Debt... Interest Rate Expected to Remain 'On Hold'

The Monetary Policy Committee Meeting on the 12th
Won-Dollar Exchange Rate Soars to Yearly High

[Asia Economy Reporter Jang Sehee] As the Bank of Korea's Monetary Policy Board is set to hold a meeting on the 12th to decide the base interest rate, the focus is on maintaining the rate in October. However, attention is turning to the November decision as market volatility may increase due to the U.S. Federal Reserve's (Fed) tapering (asset purchase reduction) and the announcement of household debt management measures.

According to the Bank of Korea, the Financial Services Commission, and market sources on the 9th, the base interest rate is expected to remain unchanged this month. This is because the household debt management plan and the Fed's tapering announcement are scheduled for mid-October and early November, respectively. The Fed is highly likely to unveil a tightening roadmap and begin tapering at the Federal Open Market Committee (FOMC) regular meeting on November 2-3.

Professor Kim Sangbong of Hansung University’s Department of Economics said, "The focus will be more on the Monetary Policy Board meeting next month than this one," adding, "The market is expected to react depending on how the Fed comments on the base interest rate when announcing tapering." Kwon Dohyun, a researcher at the International Finance Center, also stated, "If the tapering plan is concretized in November, it is highly likely to be implemented by the end of this year or early next year, so it is necessary to monitor whether domestic financial market volatility expands immediately after the announcement."

Fed Tapering, Evergrande Crisis, Inflation Concerns Rise... Financial Market Volatility Expands

In fact, recent Fed tapering, the Evergrande crisis, and global inflation concerns have increased market volatility. On the 8th, the Korean won fell to its lowest level in 17 months. On that day, the won-dollar exchange rate closed at 1,194.6 won per dollar, up 4.2 won from the previous day in the Seoul foreign exchange market. This is the highest level of the year and the highest since July 28 last year (closing price 1,196.9 won), marking the highest level in 1 year and 5 months. With U.S. monetary tightening expected to begin soon, the dollar is forecasted to remain strong for the time being.

Regarding household debt management, it is also important to observe the effects of policy responses rather than interest rate changes. Professor Sung Taeyoon of Yonsei University’s Department of Economics advised, "If interest rates are raised sharply while tightening loans, the shock to low-income households could intensify," and added, "It is necessary to monitor the effectiveness of the authorities' management measures."

However, considering that the consumer price inflation rate has remained in the 2% range for six consecutive months, indicating growing inflationary pressure, the possibility of a rate hike in November after maintaining the rate in October cannot be ruled out. The government also expects the consumer price inflation rate in October to be higher than September's 2.5%. Professor Sung Taeyoon emphasized, "Even looking only at inflation factors, a rate hike is necessary," adding, "Earlier this year, inflation was limited to food prices, but recently prices have risen across the board, so some liquidity withdrawal seems necessary."

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