"US-Korea Interest Rate Inversion Inevitable Within the Year"…Korea Financial Investment Association Holds Bond Forum

"Possibility of Increased Volatility in the Financial Market"

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] Considering the pace of tightening by the U.S. Federal Reserve (Fed), there is a high possibility that the benchmark interest rates of South Korea and the United States will invert within this year.

The Korea Financial Investment Association held a bond forum on the 31st at the Bulls Hall in the Financial Investment Center, Yeouido, Seoul, under the theme "The Impact of Korea-U.S. Interest Rate Inversion on Financial Markets and Countermeasures."

Yoon Yeo-sam, a research fellow at Meritz Securities, explained, "Due to the Fed's aggressive rate hikes to stabilize the soaring inflation, an inversion of Korea-U.S. interest rates is inevitable in the third quarter," adding, "Given the current economic and inflation levels, the U.S. benchmark interest rate will inevitably be higher than Korea's."

He also predicted, "As a result, some foreign capital may outflow, and financial market volatility could increase."

Currently, the interest rate gap between Korea and the U.S. is 0.75 to 1.00 percentage points. If the U.S. raises its benchmark interest rate by 0.50 percentage points in a 'big step' twice more within the next few months, the interest rate gap between the two countries could almost disappear or even invert.

Bank of Korea Governor Lee Chang-yong is listening to reporters' questions at the monetary policy direction press conference held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 26th. On the same day, the Monetary Policy Committee of the Bank of Korea raised the base interest rate by 0.25 percentage points from 1.50% to 1.75%. Photo by Joint Press Corps

If the U.S. benchmark interest rate becomes higher than Korea's, there are concerns about overseas capital outflows, depreciation of the Korean won, and consequent inflation.

However, Research Fellow Yoon explained, "Based on the three past experiences of Korea-U.S. interest rate inversion, there was no shock of foreign capital outflow centered on the bond market; rather, there were many cases of capital inflow."

He continued, "Even during this interest rate inversion period, if Korea maintains fiscal soundness based on a high current account surplus, domestic financial market instability will be limited," emphasizing, "It is also necessary to consider that Korea is an advanced market where domestic interest rates maintain a high correlation with global interest rates."

Yoon Chang-yong, head of the Research Center at Shinhan Financial Investment, forecasted, "By the end of the year, the Fed is expected to raise rates to 2.50?3.00%, and the Bank of Korea to 2.25?2.50%," adding, "The acceleration of tightening, economic slowdown, and increased volatility will lead to a preference for safe assets, which will moderate the speed of market interest rate increases."

He also predicted, "Geopolitical conflicts and supply chain shocks will cause various costs such as growth slowdown due to reduced trade volume, high inflation and high interest rates, intensified strong dollar pressure, and increased volatility in stock and bond markets."

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