BOK isn't fazed by Fed's jacking up of interest rates

Bank of Korea Deputy Gov. Park Jong-seok speaks at a meeting in central Seoul on March 10. [YONHAP]

The Federal Reserve’s lifting of its benchmark interest rate was hawkish but not unexpected, according to the Bank of Korea.

The Federal Reserve on Wednesday approved an interest rate increase of a quarter percentage point to a range of 0.25 percent to 0.5 percent on an eight-to-one vote. One policy board member advocated a 0.5 percent hike.

It was the first U.S. interest rate increase in more than three years. Interest rates have been near zero since the beginning of the Covid-19 pandemic.

“The result of the Federal Open Market Committee meeting was considered rather hawkish but not beyond expectations,” said the Bank of Korea Deputy Gov. Park Jong-seok.

The Bank of Korea held a meeting Thursday morning to discuss the impact of the Fed’s rate hike on domestic financial and foreign exchange markets.

Park noted the importance of thoroughly monitoring monetary policies in key countries, progress in the Russian invasion of Ukraine and global supply chain disruptions. He said these factors could have a direct impact on domestic financial markets, growth and inflation.

The government shared a similar view.

The impact of the Fed’s rate hike will be “limited on domestic financial markets,” said Lee Eog-weon, Vice Minister of Economy and Finance, at a meeting held in central Seoul on Thursday.

“The Fed’s latest decision is in line with market expectations. Its impact will be limited considering the past normalization of the Fed’s monetary policy, current global financial markets and the fundamental of Korea’s economy,”

The Bank of Korea preemptively upped its benchmark rate three times since last year and is projected by analysts to make another raise in May. Korea’s benchmark rate is currently 1.25 percent.

Lee warned that a potential debt default by Russia could result in a global liquidity squeeze, which could trigger capital withdrawal from emerging markets.

Fed officials said in a statement on Wednesday that they predict six more rate hikes this year and three more in 2023, up from a previous forecast of three hikes each year. The Fed lowered its U.S. GDP growth projection for this year to 2.8 percent from a previous forecast of 4 percent. It bumped up inflation estimates, predicting the personal consumption expenditures price index excluding food and energy to rise 4.1 percent this year, compared with a 2.7 percent projection in December.

The Korean won fell 1.59 percent to 1,214.3 won on Thursday following the Fed’s decision.

“The dollar-won exchange rate could temporarily fall below 1,200 won per dollar, but is projected to fluctuate in the 1,200 won-range,” said Kim Yoo-mi, an economist at Kiwoom Securities. She said the possibility of “faster-than-expected monetary tightening cannot be excluded from being taken into consideration.”

BY JIN MIN-JI [jin.minji@joongang.co.kr]