BOK Foreign Exchange Operations Officer "US to Raise Benchmark Interest Rate by 0.25%p Next Month... Rate Cut in First Half of Next Year"

US Dollar Expected to Slightly Weaken in the Second Half of the Year

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The U.S. Federal Reserve (Fed) is expected to end its rate hikes next month with a 0.25 percentage point increase and begin cutting rates in the first half of next year.

On the 30th, the Korea Bank Foreign Exchange Operations Department stated in its report titled "Global Economic Conditions and International Financial Market Outlook for the Second Half of 2023" that "the U.S. is expected to raise rates by an additional 0.25 percentage points at the July Federal Open Market Committee (FOMC) meeting, with the year-end rate (terminal rate) reaching 5.25?5.50%."

The report explained that although the pace of easing inflation and labor market pressures in the U.S. has not yet met expectations, the cumulative effects of monetary policy tightening, supply chain recovery, and the possibility of an economic recession suggest that inflationary pressures will somewhat ease during the second half of this year.

However, it also assessed that if inflation remains higher than expected, there is still a risk of an additional 0.25 percentage point rate hike.

Rate cuts are expected to begin in the first half of next year. Jang Go, head of the Operations Strategy Team at the Korea Bank Foreign Exchange Operations Department, said, "While U.S. rate cuts are expected to start in the first half of next year, the exact timing will depend on the pace of inflation slowdown."

According to the Fed officials' future policy rate dot plot, the policy rate is projected to be 4.6% at the end of next year and 3.4% at the end of 2025, suggesting rate cuts of 1.00 percentage point in 2024 and 1.25 percentage points in 2025, respectively.

The U.S. dollar is forecast to fluctuate within a narrow range and show slight weakness in the second half of this year.

Kim Ju-young, a manager of the Operations Strategy Team at the Korea Bank Foreign Exchange Operations Department, said, "In the second half, the U.S. dollar is expected to weaken due to easing inflation and the end of Fed rate hikes. Additionally, lingering concerns about banking sector instability from monetary tightening are also factors contributing to dollar weakness."

The report noted that inflation still exceeds target levels, uncertainty about the peak of Fed policy rates remains high, and the higher investment returns compared to other major countries, along with weaker-than-expected global economic momentum, are factors limiting the dollar's weakness.

It also explained that if economic indicators increase the need for further Fed rate hikes and the cumulative effects of rate hikes raise the risk of financial instability and recession, the dollar could strengthen.

Manager Kim added, "Like in the first half, the dollar is likely to fluctuate within a narrow range over short cycles rather than move in one direction. Due to high uncertainty about inflation, the end of tightening, and recession risks, it is difficult to predict a consistent scenario."

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