[BOK Focus] Was the Bank of Korea Right to Keep Interest Rates Steady Amid SVB Crisis?..."Uncertainty Still High"

The Bank of Korea's Rate Freeze 'Misjudgment' Criticism Subsides
Fed Also Likely to Hold Rates Amid US SVB Collapse
"Quick Freeze Decision Eases Market Burden"
However, Premature Conclusions Difficult Due to High Uncertainty

Lee Chang-yong, Governor of the Bank of Korea, is striking the gavel at the regular Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul on the 23rd. Photo by Joint Press Corps

With the bankruptcy of the U.S. Silicon Valley Bank (SVB) increasing the likelihood that the Federal Reserve (Fed) will hold interest rates steady, opinions are emerging that the Bank of Korea's (BOK) decision to be the first among major countries to halt rate hikes was ultimately correct. After the BOK froze its benchmark rate last month, the won-dollar exchange rate surged, leading to criticism of the BOK's 'misjudgment.' However, the SVB collapse has completely reversed this sentiment. Still, since it is too early to definitively predict the direction of the SVB incident and the Fed's monetary policy, many argue that it is premature to evaluate the BOK's rate freeze.

Was the BOK's Rate Freeze Correct? ... The 'Misjudgment' Recedes

According to financial markets and major foreign media on the 15th, there is growing analysis that the Fed will slow the pace of tightening at the Federal Open Market Committee (FOMC) meeting scheduled for the 21st, considering financial system stability. Initially, the market widely expected the Fed to prioritize price stability and implement a 'big step' (a 0.50 percentage point increase in the benchmark rate), but after the SVB bankruptcy, more forecasts suggest a more modest 0.25 percentage point hike. Since the liquidity crisis began due to aggressive tightening, it is difficult for the Fed to sharply raise rates while only emphasizing price stability.

Some even suggest that the Fed's rate freeze or rate cut may be approaching. Major U.S. investment banks such as Goldman Sachs and Barclays stated that "economic uncertainty has surged" and predicted the Fed would hold rates steady at this month's FOMC. As of the afternoon of the previous day, according to the Chicago Mercantile Exchange (CME) FedWatch tool, the probability of the Fed holding rates steady in the federal funds rate (FFR) futures market reached 45.4%. Before the SVB stock price plunge on the 10th of this month, the probability of a rate hold was 0%.

Therefore, voices are emerging to reassess the BOK Monetary Policy Committee's decision to be the first among major countries to freeze rates. The BOK froze its benchmark rate at 3.5% annually at the Monetary Policy Committee meeting on the 23rd of last month, ending about a year and a half of hikes. At that time, the Fed's hawkish (monetary tightening preference) atmosphere was strong, so evaluations were mixed. Especially, the won-dollar exchange rate, which was in the 1290 won range just before the committee meeting, surged to 1326.6 won within a week, and foreign bond capital outflows increased, leading to criticism that the BOK's misjudgment exacerbated side effects from the widening Korea-U.S. interest rate gap.

Although the BOK did not foresee the SVB bankruptcy or U.S. financial market instability when freezing rates, analyzing the current situation suggests the timing was good. Professor Kang Sam-mo of Dongguk University's Department of Economics said, "At that time, it was before the SVB bankruptcy, and the BOK had no choice but to freeze rates, but considering that domestic stock prices fell that day and expectations for the Fed to slow rate hikes increased, it is true that the decision had a positive effect," adding, "For the BOK, the reasons to raise rates further have diminished."

[Image source=Yonhap News]

Uncertainty Remains Over 'SVB Ripple Effect'... "Need to Watch the Situation Further"

However, many argue that it is still difficult to say that the end of tightening is the trend due to the large uncertainties surrounding the SVB incident's ripple effects and the Fed's rate decisions. Mohamed El-Erian, Chief Economic Advisor at Allianz and a prominent figure in the bond market, recently told CNBC that if the Fed insists on a 0.25 percentage point rate hike, the high interest rate environment will persist longer, slowing the economy and damaging the Fed's credibility. He said the Fed should raise rates by 0.50 percentage points at this FOMC meeting. He explained that stopping rate hikes could lead to stagflation, with inflation unchecked and economic slowdown.

Even if the Fed does not raise rates this time, some believe tightening will continue until inflation is controlled. Goldman Sachs and Barclays, which forecast a rate hold, see a low possibility of a Fed rate hike this month, but expect tightening to resume after the SVB bankruptcy situation is resolved. If additional U.S. tightening widens the current 1.25 percentage point Korea-U.S. benchmark rate gap, or if safe-haven demand causes domestic stock market capital outflows and the won-dollar exchange rate to rise, the BOK may resume rate hikes.

Although the SVB incident has caused major stock markets to generally decline and created turmoil, the possibility of it escalating into a large-scale liquidity crisis is low, so it is advised to watch the monetary policies of the U.S. and other major countries further. Professor Kang said, "The atmosphere has completely changed since before the SVB bankruptcy, and it is true that additional tightening has become difficult," but added, "We need to see how the SVB bankruptcy affects other financial institutions first, and the Fed will decide on rate hikes or slowing the pace while monitoring the situation."

U.S. inflation is also considered a variable. The U.S. Department of Labor announced the February Consumer Price Index (CPI) rose 6.0% year-on-year, down from 6.4% in January, but the core CPI monthly increase was 0.5%, up from 0.4% in January. Overall, inflation appears to be slowing, but since core CPI remains high, many expect the Fed to raise rates gradually. This would increase pressure on the BOK to raise rates as well.

The BOK also states that the rate freeze is merely a 'breather' to observe future trends and does not mean tightening has ended. A BOK official explained, "Last month's rate freeze does not mean tightening is over," adding, "The Monetary Policy Committee will decide the benchmark rate after monitoring inflation trends and domestic financial market conditions." Earlier, BOK Governor Lee Chang-yong said at a press conference after last month's Monetary Policy Committee meeting, "Unlike last year, it is now time to focus mainly on domestic factors and inflation pass-through rather than the Fed when conducting monetary policy."

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