Source: Newsis
The U.S. Federal Reserve (Fed) announced on May 1st (GMT) that it is ready to maintain the current interest rate level for a long time, maintaining a cautious attitude towards interest rate cuts. This has increased the likelihood that the Bank of Korea will also decide to freeze the base rate on the 23rd of this month. Considering the price instability and the historical maximum interest rate difference of 2% with the U.S., it is difficult to lower the interest rate ahead of the U.S.
At the regular FOMC meeting held from April 30th to May 1st (GMT), the Fed froze the base rate target range at 5.25-5.50%, 2.0%p higher than Korea’s 3.50%.
In June of last year, the Fed paused its interest rate hikes after about 15 months and then took a small step by raising rates by 0.25 percentage points in July. Since then, interest rates have been frozen six times in a row, including September, November, December, January, and March of this year.
The FOMC statement added the phrase ‘recent inflation target achievement has not shown additional progress,’ and the ’employment and price situations are moving to a better balance’ was revised to ‘moved to a better balance last year.’ The Fed officially admitted that there has been no progress in inflation this year. Chairman Powell also said, “Economic indicators this year have not given us (greater confidence that inflation is heading towards 2%)” and “It will take longer to gain greater confidence than we previously expected.”
Despite the current price situation and pessimistic forecasts regarding interest rate cuts, the market’s fears of more robust hawkish remarks or actions did not materialize. Chairman Powell stated, “Evidence is needed that the current interest rate is not sufficiently restrictive for further hikes, but such is not the case at present.” He dismissed the need for additional interest rate increases. Moreover, starting in June, the Fed decided to slow the pace of quantitative tightening (QT). This included reducing the monthly treasury bond redemption limit to absorb liquidity more gradually.
Experts are confident that the Bank of Korea will freeze interest rates on the 23rd. Leading interest rate cuts ahead of the Fed is challenging, and instability in prices and exchange rates continues to persist.
As announced by the Statistics Office on the same day, the rise rate of the consumer price index was 2.9%. This marks the first drop below the 3% range in three months. However, due to the impact of international oil and fruit and vegetable prices, it remains significantly above the target of 2%.
Rhee Chang Yong, the Governor of the Bank of Korea, stated after the Monetary Policy Committee (MPC) monetary policy decision meeting on the 12th of last month, “Our expected average consumer price increase rate in the second half of the year is 2.3%. If oil prices stabilize and this path is maintained, there is a possibility of a rate cut in the second half of the year. However, if it exceeds this path, a rate cut may be difficult.”
The unstable exchange rate trend is also a reason why the Bank of Korea cannot rashly lower the interest rate.
As of 9:13 a.m. (KST) on March 2nd, the KRW-USD exchange rate at the Seoul foreign exchange market was recorded at KRW 1379.9, down KRW 2.1 from the previous trading day. The exchange rate opened at KRW 1378.2, down KRW 3.8, and is fluctuating slightly in the KRW 1370 range. Although the KRW-USD exchange rate jumped to the KRW 1400 range for the first time in about 17 months on the 16th of last month, it has since calmed down somewhat. However, it still does not fall significantly in the KRW 1370-1380 range.
As the KRW falls (the KRW-USD exchange rate rises), the conversion price of the same imported product in KRW increases. This can be a burden on inflation (price rise) management from the perspective of the Bank of Korea.
Meanwhile, some experts have mentioned the possibility of household consumption shrinkage and maintained the Fed’s interest rate cut forecast for September.
Lee Seung Hoon, a researcher at Meritz Securities, explained, “The futures market is seeing a 1.4-time cut by the end of the year after the May FOMC, but we maintain a 3-time (September, November, December) cut forecast.” He added, “This considers the risk that the growth of private consumption, centered on the middle and low-income groups with high consumption propensity, may slow down more than expected due to the exhaustion of excess savings and the burden of principal repayment.” The researcher said, “If such a risk is realized, it has a high possibility of exerting downward pressure on both the economy and inflation.”
Park Sung Woo, a researcher at DB Financial Investment, also said, “The savings rate fell to 3.2% in the March PCE report, which indicates that U.S. households are spending through existing savings and loans, not income.” He added, “Considering that the growth of household consumption expenditure will slow down in the future, we expect an environment where 1-2 policy interest rate cuts can be made in the second half of the year.”
Baek Yoonmin a researcher at Kyobo Securities, also said, “We maintain the Fed’s first base rate cut forecast in the third and fourth quarters.” He added, “If the path of disinflation slowdown is not simply bumpy but the risk of inflation is expanding again, it is inevitable to significantly revise the monetary policy outlook path from the Fed’s perspective.”
