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Finance Minister Choo warns of 'higher for longer' rates

US FOMC leaves its benchmark rate unchanged, South Korea-US rate gap maintained

By Im Eun-byel

Published : Sept. 21, 2023 - 15:53

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Finance Minister Choo Kyung-ho attends a meeting with financial officials Thursday, in response to the US Federal Reserve’s decision to hold the benchmark rate. (Yonhap) Finance Minister Choo Kyung-ho attends a meeting with financial officials Thursday, in response to the US Federal Reserve’s decision to hold the benchmark rate. (Yonhap)

Financial Minister Choo Kyung-ho said Thursday high interest rates could persist for longer than expected in response to the US Federal Reserve’s decision to hold its policy rates steady earlier in the day.

The US Federal Open Market Committee kept its policy rates unchanged at 5.25-5.5 percent, maintaining the rate gap between South Korea and the US at up to 2 percentage points. The Bank of Korea’s current base rate stands at 3.5 percent.

“The FOMC decision shows high rates could prolong, which could lead to heightened uncertainty of the global economy,” Choo said during a meeting with Bank of Korea Gov. Rhee Chang-yong and other officials Thursday.

“Though Fed Chair Jerome Powell said the Fed will decide on the monetary policy stance considering the economic, financial circumstances, he did not rule out the possibility of a further rate hike, saying the restrictive rates will be maintained until inflation eases out,” Choo said.

Despite the escalating uncertainty in the global financial market, Choo said the local financial market had become relatively stabilized.

"Foreigners’ investment in the local stock market has been strong. The currency rates have been stable compared to major nations, and also the equity and bond market in overall,” Choo said.

The central bank of Korea also projected that the Fed could further raise the rate this year.

“Though the Fed decided to freeze the policy rate, it left room for a further rate hike within this year and moved up the projection for the rates in the end of next year, signaling it will maintain its monetary tightening stance," BOK Deputy Gov. Lee Seung-heon said in a separate meeting.

Lee further expressed concern about surging international oil prices. With the production cut decision from major oil producers, the prices of crude oil reached annual highs in the global market earlier this week.

"The recent upward trend in oil prices could put additional inflationary pressure on the economy," Lee said.

As Lee pointed out, inflation has been rebounding in Korea. After staying in the 2 percent range for few months, Korea’s consumer prices growth in August rose on-year to 3.4 percent. Earlier this month, the BOK said though it had expected the inflation to rebound from last month, the pace exceeded the expectation.

With the Fed signaling an extended period of high rates, market watchers view the BOK is likely to maintain a hawkish tone. Though BOK Gov. Rhee has repeatedly stressed Korea does not have to “mechanically” follow the Fed’s rate decision, the rate gap puts pressure on the Korean economy.

“It has become more likely that the BOK will maintain high rates for longer. The monetary policy board is likely to keep the terminal rate at 3.75 percent for a considerable period of time,” economist Ha Keon-hyeong from Shinhan Securities said.

“Though Korea’s economic growth is weaker than that of the US, the BOK also requires higher rates for longer considering the rate of inflation and the increasing household debt,” Ha said.

“With the US Fed unlikely to cut rates soon, it may be difficult for Korea to lower the rates in the first half of next year," said Yoon Yeo-sam, an analyst at Meritz Securities, who also predicted Korea's rate cut to come sometime in July next year.

With the US Fed hinting on tighter policy through earlier next year, Korea’s financial market remained slow Thursday.

Korea's benchmark Kospi closed at 2,514.97 points, 1.75 percent lower than the previous closing day. The secondary bourse Kosdaq closed at 860.68 points, down 2.5 percent.

The Korean won weakened to 1,339.7 won against the US dollar, 9.6 won higher than the previous day. It surpassed 1,340 won during trading hours for the first time in a month since Aug. 23, reaching 1,342.2 won.

The Bank of Korea is set to hold its next rate-setting meeting on Oct. 19.