BOK heeds possibility of US rate hikes later this year

The Bank of Korea said it would remain vigilant following the US Federal Reserve’s decision to pause its interest rate hike cycle for the first time in 15 months, noting the possibility of a further increase later this year.

The Federal Open Market Committee unanimously kept its key borrowing target range at 5 percent to 5.25 percent, after 10 consecutive rate increases since March last year. The rate freeze was aligned with expectations in the market but the Fed also signaled that additional rate increases are possible if necessary to keep its inflation cool.

“The Fed froze the policy rate at the FOMC, but it is worth noting that it hinted at a further rate hike and denied the possibility of a cut by the end of this year,” the BOK Deputy Gov. Lee Seung-heon said during a meeting focused on examining the international financial market situation and its impact on the domestic financial and foreign exchange markets.

During a press conference on Wednesday, Federal Reserve Chair Jerome Powell said the rate hike pause came by “considering how far and how fast we’ve moved.”

"Looking ahead, nearly all committee participants view it as likely that some further rate increases will be appropriate this year," he added.

The Fed raised its projection for where interest rates will stand at the end of the year to 5.6 percent, signaling two more rate hikes.

Market watchers noted that the Fed’s decision may indicate an end of tightening cycle.

“Even if the rate hike resumes at the next July rate-setting meeting, it is more appropriate to evaluate it as a kind of exit strategy to wrap up the tightening rather than meaning that the tightening cycle will proceed anew,” said Daishin Securities Economist Kong Dong-rak.

The US rate pause gives an instant relief to Korea’s central bank as the gap in benchmark interest rates between Korea and the US won’t be widened for the time being. The gap will remain at an all-time high of 1.75 percentage points.

Last month, the BOK kept its benchmark seven-day repo rate unchanged at 3.5 percent, the third straight month of rate freezes, as it trimmed this year's growth estimate from 1.6 percent to 1.4 percent in the face of an extended slowdown in exports.

Concerns have been mounting that the interest rate spread widening could pose a downside risk to the Korean economy such as capital outflow to overseas markets and a prolonged current account deficit.

BOK Deputy Gov. Lee noted the market response that did not accept the comments of central banks in major countries such as the Fed on the possibility of further monetary tightening.

“Monetary policy stance of central banks in major countries is strengthening, with Australia and Canada recently resuming interest rate hikes,” he said.

"The market's response is somewhat different from this stance, and we will closely monitor related market conditions as volatility in domestic and foreign financial markets may increase as expectations for monetary policy change depending on major economic indicators to be released in the future.”

The US FOMC meeting is slated for July 25-26. The BOK’s rate setting meeting will take place July 13.