Concerns about the US-Korea interest rate inversion are resurfacing as it becomes clear that the US Federal Reserve and the Fed will significantly raise interest rates at next week's monetary policy meeting and FOMC.
In particular, considering the recent higher-than-expected inflation index, the Fed has been talking about raising the base rate by 0.75%p and even more than 1%p, so the interest rate gap between Korea and the US is expected to widen further.
Giant Step? Ultra Step?
The U.S. benchmark interest rate will be determined at the FOMC meeting on September 20-21 local time.
The current US benchmark interest rate is 2.25-2.50%.
However, if you take the 'giant step', which raises 0.75%p, it rises to 3.00-3.25% and greatly exceeds the Korean base rate of 2.50%.
If the Fed implements an 'ultra-step' that raises the rate by 1 percentage point to show the Fed's strong determination to "catch inflation quickly," the gap between the interest rates between the US and Korea will widen.
The US Fed's aggressive mood is due to the higher-than-expected CPI for August, released last week.
The CPI for August was 8.3%, higher than the 8.0% expected by the market.
In fact, before the CPI announcement, there were many forecasts that "the Fed will raise interest rates by 0.5%p or 0.75%p", but after the announcement, the forecast of 0.75p or 1%p has prevailed.
According to the Chicago Mercantile Exchange (CME) estimate, a 0.75 percentage point increase is still more likely than a 1 percentage point increase.
What steps should the Bank of Korea take?
If the U.S. aggressively raises its benchmark interest rate, it is likely to be between 4% and 4.25% by the end of the year.
Many US investment institutions are expecting the year-end level of 4%, such as Bloomberg recently raising the US year-end base rate forecast to 4.23% from 3.9%.
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However, there are only two monetary policy meetings left for the Bank of Korea to set the base rate this year.
Even if the remaining meeting raises both 0.25%p increments twice, Korea's base rate is expected to remain at 3.00%.
In this case, the gap between the US base rate (4.00-4.25%) and Korea (3.00%) at the end of the year could widen to 1.00 to 1.25 percentage points.
If the gap between the base interest rates between the US and Korea widens, the possibility of a large-scale capital outflow in the Korean financial market is raised, and it is evaluated that the Bank of Korea's concerns are deepening as it may negatively affect the exchange rate.
In July, Lee Chang-yong, governor of the Bank of Korea, said, "As long as the price flow does not deviate significantly from the forecast path, it is desirable to raise it gradually by 0.25 percentage points for the time being."