Hyundai Research "Korea-US Base Rate Difference Up to 1.12%p"

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[Asia Economy Reporter Yoo Hyun-seok] An analysis has emerged that the appropriate benchmark interest rate differential between South Korea and the United States will be 0.52?1.12 percentage points.

On the 2nd, Hyundai Research Institute stated in its report "Estimation and Implications of the Appropriate Benchmark Interest Rate between Korea and the U.S." that the appropriate benchmark interest rate differential between South Korea and the U.S. for the fourth quarter of this year, derived using the Taylor rule, is 0.52?1.12 percentage points.

Based on an analysis considering South Korea’s interest rate policy and exchange rates, the institute estimated that South Korea’s appropriate benchmark interest rate for the fourth quarter of this year will be 3.73?4.02%, which is 23?77 basis points higher than market expectations. It also forecasted that the U.S. appropriate benchmark interest rate for the same period will be 4.54?4.85%, exceeding the market expectation range of 4.25?4.5%.

Research Fellow Lee Hyung-seok said, "According to market forecasts, the Korea-U.S. benchmark interest rate gap is expected to widen to 0.75?1.26 percentage points by the end of this year," adding, "The appropriate benchmark interest rate differential between the two countries at the end of this year, as examined through the interest rate rule, is generally expected to fall within the range of the interest rate differential projected by the market."

The institute projected that, considering the upcoming schedule amid the current situation where the Korea-U.S. benchmark interest rates have inverted due to the Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) aggressive rate hikes, the inversion gap will further widen. It emphasized the need to prepare for the intensification of foreign exchange market instability that could arise from the benchmark interest rate differential, as the exchange rate has surged this year in line with the widening inversion gap between the two countries’ benchmark interest rates.

Research Fellow Lee stated, "Given the high inflation, high interest rates, and global recession concerns, the possibility of a domestic economic downturn has significantly increased, so policy direction should consider not only price stability but also defense against economic recession," adding, "It is necessary to prepare for the potential deterioration of household debt that may occur with interest rate hikes."

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