After the five-day Chuseok holiday, the local economy and financial markets will face significant external influence from the US in the form of a decision to be publicized here Sept. 22.
If the US Federal Reserve keeps its base rate untouched again during the gathering of the Federal Open Market Committee, slated for Sept. 20-21, South Korea’s policymakers might be given more time to boost the economy in the fourth quarter.
Some foreign investment banks even predict the Bank of Korea could choose another rate cut late this year (feasibly in October) in a bid to back up the government’s struggles to raise the yearly economic growth rate.
Should the FOMC raise the rate this week, at least a short-term shock to the domestic market is unavoidable. Investors will actively pull their position out of risky assets like stocks on the local market, and the Korean won will sharply lose value against the US dollar.
Under a US hike, there is no room for the BOK to conduct a cut due to worries over massive capital outflow. The most serious case would involve rising lending rates of local banks under that assumption. The central bank and Finance Ministry will have to map out contingency plans against a possible hard-landing of household debt involving mortgages.
Seoul, historically, has been irregularly obsessed with the growth rate of gross domestic product. But the figure would be less meaningful if growth is dependent upon a real estate bubble based on mortgages.
It is absurd to trace risks like the US subprime mortgage crisis, under which the world’s No. 1 superpower suffered financial woes in the wake of the reckless low-interest rate policies of the 2000s.
Like the crisis of the US’ middle- and low-income citizens in 2008 and 2009, a large portion of Korea’s household debtors could fail to pay the interest and principal on their mortgages. The local household sector was vigorous in purchasing apartments over the past two years on the back of continuous monetary easing from August 2014.
BOK conducted cuts five times during Gov. Lee Ju-yeol’s term. Korea’s key rate has fallen by 125 basis points in the past two years to settle at a record low of 1.25 percent per annum.
An unsettling scenario is that Korea will ease the rate once more as the Fed maintains its rate this week. Builders are set to parcel out a huge number of new apartments after the Chuseok holiday, which would be an effective tool for the government to elevate sagging GDP growth.
At least half of global investment banks project the Fed, led by Chair Janet Yellen, will not raise the key rate this time. The American central bank should also be held accountable for its “Hollywood” actions in which its officials have yet to carry out real action after delivering remarks signaling hikes many times since early this year.
Despite losing credibility from crying wolf, it is unquestionable the US will eventually normalize its interest rates from past quantitative easing -- possibly in the December gathering after the Nov. 8 presidential election.
In that context, a freeze by the FOMC this week may not be a time save for boosting growth, but a perilous extension of a property bubble for Korea.
For Seoul, it may be better for the Fed to select a hike in the coming days in terms of blocking BOK from pushing for a cut. Any ridiculous monetary policy among local rate-setters could be calamitous to the overall economy. The tightening in Washington would have much greater impacts on the local economy than did the Brexit poll result.
