On the 27th (local time), the US Federal Reserve (Fed) again took a 'giant step' (increasing the base rate by 0.75 percentage points at a time), and the US-Korea base rate inverted for the first time in about two and a half years.
The Federal Reserve raised its benchmark interest rate by 0.75 percentage points (p) to 2.25 to 2.50 percent at its regular meeting of the Federal Open Market Committee (FOMC).
As a result, the US base rate overtook Korea's base rate (2.25%), and the US interest rate reversed for the first time in about two and a half years since February 2020.
Economists and financial experts say that the inflationary pressure caused by the sharp rise in international raw material prices is difficult to resolve within this year, and the interest rate in the US and Korea has also reversed. I see no.
However, as the US-Korea base rate inversion is an expected scenario, it is highly unlikely that the BOK will take another 'big step' (a 0.50 percentage point increase in the base rate at a time) at the Monetary Policy Committee (Monetary Policy Committee) next month. This prevails.
Experts predicted that Korea's base interest rate, which is currently 2.25%, will continue to rise at the Monetary Policy Direction Meeting of the Monetary Policy Committee, which remains three times until the end of the year (August, October and November), to reach 2.75-3.00% by the end of the year.
This means that there will be no significant changes in the course of interest rate hikes that BOK Governor Chang-yong Lee proposed right after the MPC on the 13th, when he took the first big step in history.
At the time, Governor Lee said, "I think it is desirable to raise the interest rate gradually by 0.25 percentage points (p) for the time being," and evaluated the market outlook that the base rate at the end of the year could rise to 2.75 to 3.00% as reasonable.
Park Seong-wook, head of the macroeconomic research department at the Korea Financial Research Institute, said, "As the governor talked about something during the last Monetary Policy Committee, we expect Korea's base rate to be around 3% at the end of the year."
Kim Jeong-sik, a professor of economics at Yonsei University, also said, "Something the governor said, and I think 3.00% is economically appropriate.
Joo Won, head of research at Hyundai Research Institute, predicted that the year-end base rate would be in the high 2% range, saying, "The US-Korea interest rate reversal was inevitable."
Jeon Seong-in, a professor at Hongik University, also judged, "Once the market has agreed on the level of 2.75~3.00%, there are currently no other factors that can deviate from that level."
The government and the Bank of Korea also evaluated that the US interest rate hike would have a limited impact on Korea.
Deputy Prime Minister and Minister of Strategy and Finance Choo Kyung-ho said at an emergency macroeconomic and financial meeting on the morning of the 28th, "The decision of the US Federal Reserve is largely in line with market expectations."
At today's market review meeting, the BOK also assessed that the impact of the US interest rate hike on domestic and foreign financial markets is somewhat limited.
Experts did not believe that the BOK's Monetary Policy Committee is highly likely to take another 'big step' next month.
Enlarging an image
This means that it is difficult to continuously raise the base interest rate sharply under the pretext of price management in a situation where there is a big risk of a recession.
In the second quarter of this year, the real gross domestic product (GDP) growth rate (preliminary estimate, quarter-on-quarter) was recorded at 0.7%, far exceeding the market forecast (0.3%).
Although the burden of raising the base rate in August has eased, downside risks have increased from the second half of the year, so it is impossible to simply raise the base rate.
However, if inflation is not stable in the second half of the year, the rate of interest rate hike may be accelerated.
According to the BOK, the expected inflation rate in July was 4.7%, up 0.8 percentage points from June (3.9%).
Both the expected inflation rate and the extent of its rise are both at their highest and highest levels since the statistics were compiled.
As consumers expect that prices will continue to rise at a rapid pace for the time being, it is also true that a strong base rate hike is necessary to dampen inflation expectations.
“The big step in August will be difficult,” Joo said.
He added, "In particular, if exports fall sharply in the second half of the year, it will be difficult to raise the base interest rate arbitrarily."
Professor Jeon said, "The possibility of a big step right now is not great, but the key is the US price index that comes out in early August."
The US consumer price index (CPI) and producer price index (PPI) for July will be released on August 10 and 11, respectively.
Professor Jeon said, "There is a view that prices are gradually stabilizing, but if inflation is not caught, the path of US interest rate hikes may be steep, which will be a variable in the BOK's response."
"If global inflation rises, the Fed will have no choice but to widen the range of interest rate hikes, and the BOK could raise interest rates more aggressively," said Park. "He said.
Federal Reserve Chairman Jerome Powell said at a press conference shortly after the FOMC's regular meeting that "inflation was worse than expected" and "we need to slow growth" to catch inflation.
"Another 'extraordinary impression' may be appropriate at the September meeting," Powell said.
"As the monetary policy stance moves in a more austere direction, it may be appropriate (later) to slow the pace of rate hikes while we assess the cumulative impact of policy adjustments on the economy and prices," he said. I left the possibility open.
Even if the exchange rate soars, there is an opinion that the BOK can take another 'big step'.
Professor Kim said, "I think the BOK can take one more big step if the won/dollar exchange rate crosses the 1,400 won level due to an increase in US interest rates, etc. in a situation where no currency swap has been signed."