BOK must make plans for Fed’s rate increase

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BOK must make plans for Fed’s rate increase

It has become clear that Korean monetary policymakers are running out of time to prepare for the impact of U.S. Federal Reserve’s normalization of its near-zero interest rate.

After a two-day meeting in Washington, Federal Reserve Chair Janet Yellen on Wednesday signaled that the U.S. central bank will raise the interest rate, which it has not done since 2006.

At the press conference Yellen did not use the term “considerable time” to describe how long the near-zero interest rate would be maintained. Instead, the Fed said it would be “patient” in deciding when to raise the interest rate, which the market accepted as a signal that the Fed will move toward normalizing it.

“As indicated in our policy statement, the Federal Open Market Committee [FOMC] reaffirmed its view that the current zero to one-quarter percent target range for the federal fund rate remains appropriate,” Yellen said. “The committee also upgraded its forward guidance for the federal fund rate indicating that the committee judges can be patient in beginning to normalize the stance of monetary policy.”

Some analysts said it is a clear sign that the U.S. Federal Reserve will raise the interest rate as early as in April or at least by June.

“Although Yellen has said that they were changing the guidance from ‘considerable time’ to ‘patient,’ it does not necessarily mean that the FOMC is changing its policy direction, but when you look at a similar case in 2004, one can assume that the Fed is now entering an interest rate normalization cycle,” said Kwon Kyu-baek, an analyst at Etrade Securities.

In December 2003 the FOMC used the term “considerable period” in its guidance report, then instead said it would be “patient” about the interest rate in January 2004. By June that year, the Fed raised the target interest on the federal funds rate by 25 basis points.

As in 2004, the FOMC is unlikely to raise the interest rate immediately. Yellen said the normalization process will not likely happen for at least a couple of meetings and will depend on data.

Meetings are scheduled to take place next month and in March and June.

The changing mood in the United States is reducing the time the Korean central bank has to prepare to cushion against the blow.

Earlier this year, the global market, and especially emerging markets, panicked after it was rumored that the U.S. central bank would begin to normalize its extremely low interest rate, which could lead to an exodus of foreign investors.

When U.S. interest rates go up, Korea will be among the emerging markets that will lose hordes of foreign investors.

Although Korea’s key interest rate is still 2 percent, which is higher than in advanced economies, the central bank has been under immense pressure from the central government to lower the rate to prevent the economy from falling into deflation.

But Bank of Korea Governor Lee Ju-yeol has argued that Korea is not even close to deflation, with 3 percent growth and over 1 percent inflation.

Governor Lee did not dismiss the possibility of lowering the key rate during a press conference after the bank’s monthly monetary policy committee meeting last week. Many market experts expect the central bank to lower the rate in the first quarter.

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