US Fed's Unprecedented Rate Hike Expected... Bank of Korea's Possibility of 'Emergency Monetary Policy Committee'

Concerns Over US Giant Step Amid Rising Inflation
No June Monetary Policy Meeting for BOK... Possibility of Interest Rate Inversion
Interim Monetary Meeting Possible but No Rate Hikes Yet
Big Step Possible Next Month... Financial Markets Turbulent

On the 13th (local time), specialists are gathered at the posts in the trading floor of the New York Stock Exchange (NYSE) in the United States, handling their tasks.
[Image source=Yonhap News]

As inflation exceeds expectations, there is growing speculation that the U.S. Federal Reserve (Fed) may take a 'giant step' by raising the benchmark interest rate by 0.75 percentage points at once, drawing attention to the Bank of Korea's (BOK) response strategy. With the possibility of a Korea-U.S. interest rate inversion approaching and turmoil increasing due to a sharp drop in stocks and the Korean won, some analysts suggest that the BOK may push ahead with a 'big step' (a 0.5 percentage point rate hike) next month or, although less likely at the moment, hold an emergency Monetary Policy Committee meeting for the first time ever to raise the benchmark rate.

According to the BOK on the 15th, the Monetary Policy Committee (MPC) meetings that decide this year's benchmark interest rates are scheduled for July, August, October, and November, totaling only four times. There will be no MPC meetings this month, when the Fed is expected to take a giant step, nor in September or December. Until 2016, the BOK held MPC meetings monthly to set the benchmark rate, but from 2017, it reduced the number to eight annually, aligning with the U.S. This was intended to reduce the workload of staff and allow for more thorough consideration in monetary policy, but with the Fed rapidly raising rates, concerns are growing that the BOK's response may be delayed.

With expectations that the Fed will take a giant step on the 16th (Korean time) for the first time in 28 years, the won-dollar exchange rate is approaching 1,300 won, and the KOSPI has fallen below 2,500 for the first time in 19 months. The possibility of a Korea-U.S. interest rate inversion is also problematic. Currently, the gap between Korea's benchmark rate (1.75%) and the U.S.'s (0.75?1.0%) is 0.75 to 1 percentage point. If the U.S. takes consecutive big steps in June and July, the Korea-U.S. interest rate relationship will invert.

Bank of Korea Governor Lee Chang-yong is presiding over the Monetary Policy Committee plenary meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 26th of last month.
[Image source=Yonhap News]

When the BOK reduced the number of MPC meetings to eight, it responded to concerns that "it may be difficult to respond to situations if global uncertainties increase" by stating that "emergency meetings can be held if necessary," but so far, the BOK has never held an emergency MPC meeting to raise interest rates. While emergency MPC meetings were held to lower rates during the 2001 '9/11 attacks,' the 2008 financial crisis, and the 2020 COVID-19 outbreak, raising rates in such meetings has been regarded as an unwritten rule.

A BOK official said, "When lowering rates, holding emergency MPC meetings is acceptable because everyone benefits, but when raising rates, doing so unexpectedly and urgently could cause significant shocks to the bond and stock markets," adding, "Unless the U.S. holds an emergency MPC meeting to raise rates, it is unlikely that the BOK will do so at this time."

Professor Kim Jin-il of Korea University’s Department of Economics said, "There is a possibility of holding an emergency MPC meeting, but the first question is whether the BOK judges the situation to be that urgent," adding, "If they do, the second question is how they will communicate with the market. It is problematic if the market reacts too lightly or too severely, so there are risks on both sides."

Therefore, some speculate that the BOK may take a big step next month. While the BOK's stance is that raising rates by 0.25 percentage points is more appropriate considering economic growth, its position could change depending on the U.S. situation. Governor Lee Chang-yong also hinted at further rate hikes on the 10th, stating, "At this point, it is difficult to see us proactively adjusting the degree of easing any further."

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