Respite from monster U.S. rate rises plays well in cautious Korea

Finance Minister Choo Kyung-ho, second from right, and Bank of Korea Gov. Rhee Chang-yong, second from left, pose for a photo in a meeting held in central Seoul on Thursday. [YONHAP]

A respite from monster three-quarter-point U.S. rate increases was met with hope in Korea, and with a sense of caution, as a myriad of risks still remain and the possibility of a return to hawkishness is still very much a threat.

Financial markets continued to stabilize and firm up following the U.S. Federal Reserve's much-expected half-point increase on Wednesday. Bonds, short-term paper and the currency stabilized in the run-up to the rate announcement and held gains.

“Yields for commercial paper fell for three days straight for the first time since early October, and the yields on corporate bonds are falling while the amount being issued is steadily increasing,” said Finance Minister Choo Kyung-ho.

The average yield for 91-day commercial paper in Korea was 5.48 percent on Wednesday, compared to 5.54 percent last Friday. The won traded below 1,300 won to the dollar after hitting 1,444.2 won on Oct. 25.

Market uncertainties remain high, Choo added.

“The latest rate increase does not diverge largely from the initial market expectation,” he said. “The volatility of the international financial market this early morning was limited, but the trend needs to be observed.”

Choo vowed to maintain and introduce support measures to prevent a liquidity crunch.

The Fed took a break from the three-quarter-percentage-point-per-meeting rises that started in June. Wednesday’s move brings the federal funds rate to between 4.25 and 4.5 percent, higher than the Bank of Korea’s 3.25 percent base rate.

“I would say it’s our judgment today that we’re not in a sufficiently restrictive policy stance yet,” said Fed Chairman Jerome Powell in a press conference following the rate announcement. “The inflation data received so far in October and November show a welcome reduction in the pace of price increases, but it will take substantially more evidence to give confidence inflation is on a sustained downward path.”

U.S. inflation eased in November to 7.1 percent, down from 7.7 percent in October. The Fed’s median forecast on Wednesday showed the rate may rise as high as 5.1 percent in 2023, up from its 4.6 percent forecast in September.

The S&P500 declined 0.61 percent on Wednesday and Nasdaq closed down 0.76 percent.

The Kospi fell 1.60 percent on Thursday and the Kosdaq 0.87 percent.

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