The tightening pace in the United States is in line with expectations and will likely have limited impact on both the Korean market and domestic monetary policy in its focus on aiding the country’s still weak economic recovery, said Bank of Korea (BOK) Governor Lee Ju-yeol.
A gap of 25 to 50 basis points in the interest rates of Korea and the U.S. is unlikely to trigger a capital flight, Lee told reporters after the U.S. Federal Reserve bumped up the fed fund rate target to 1.75-2.0 percent in a second hike this year.
Since taking office earlier this year, Fed Chair Jerome Powell has said the normalization pace will have to be faster given the strengthening in the economy on both the labor and inflation fronts as well as fiscal stimulation from tax cuts and increased federal spending. He signaled four instead of three hikes would be needed this year to avoid overheating.
“It (the outlook for four instead of three hikes) is not a surprise,” said Lee.
The U.S. financial markets remained relatively calm, as did the Korean market.
The U.S. central bank left its estimate of what it considers as a neutral rate at 2.9 percent. Under its timetable, the U.S. benchmark rate will average 2.4 percent by the end of 2018, 3.1 percent in 2019, and 3.4 percent by 2020 before declining.
Given Lee’s most recent comment to keep an accommodative policy regardless of tightening actions elsewhere where economic pickup is more evident, the BOK is likely to hold the policy rate steady at 1.50 percent at the next July meeting and may wait until the third hike in the U.S. to keep the gap within the 50 basis point range.
Asked whether the faster tightening pace in the U.S. can sway the monetary policy in Korea, Lee said “conditions are fluid” and that he will “continuously discuss the matter with the monetary policy board members.”
The yield on Korea’s three-year government bond gained 0.4 basis points to close Thursday at 2.227 percent. The yield on the five-year bond was up 0.5 basis points at 2.502 percent. The Korean won fell 5.9 against the U.S. dollar to 1,083.10. The main Kospi closed down 1.84 percent at 2,423.48.
By Yoon Won-sup and Kim Hyo-jin
[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]