The Bank of Korea: "Divergence in Major Countries' Monetary Policies Due to Russia-Ukraine Invasion Impact"

US Interest Rate Hike Proceeding as Expected
Possibility of Delay in Eurozone Until Early Next Year

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jeong] The Bank of Korea forecasted that the pace of normalization of monetary policies among countries will vary due to the aftermath of the Russia-Ukraine invasion.

On the 15th, the Bank of Korea's foreign exchange operation department stated in the report titled "Assessment of Geopolitical Risk Escalation and the Impact on Major Countries' Monetary Policies" that "uncertainty regarding the normalization of monetary policies in major countries is gradually increasing."

The Bank of Korea explained that going forward, the normalization of monetary policies in major countries is likely to be differentiated between countries prioritizing inflation response and those concerned about the possibility of stagflation (economic recession + rising prices).

It also noted that countries where monetary policy normalization is underway or imminent will proceed as originally planned, while others are expected to maintain a somewhat cautious stance.

[Image source=Yonhap News]

In the case of the United States, it is expected that the Federal Reserve's monetary policy normalization will proceed as initially anticipated due to persistent high inflation and the economic impact of the Russia-Ukraine war. Although the geopolitical risks related to Russia have lowered the likelihood of aggressive rate hikes in the short term, the pace of rate increases this year (6 to 7 times, with year-end rates around 1.5% to 1.75%) is expected to be maintained.

JP Morgan and Goldman Sachs evaluated that since the U.S. Fed prioritizes inflation response and the economy continues to show favorable conditions such as strong employment, the impact of the Russia-Ukraine war on monetary policy will gradually diminish.

The United Kingdom, with a small trade volume with Russia and low energy dependence, is expected to see the Bank of England continue rate hikes in the first half of the year as originally anticipated.

The Bank of Canada raised its policy rate from 0.25% to 0.5% on the 3rd of this month even after the outbreak of the war, and the prevailing view is that it will continue rate hikes six times throughout the year.

On the other hand, the Eurozone is expected to be significantly affected by geopolitical risks due to its geographical proximity and high energy dependence, raising the possibility that the European Central Bank (ECB) will delay rate hikes. JP Morgan and others predict that the hikes could be postponed until early next year.

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