[Journalism Internship] All eyes, including the Bank of Korea’s, are on the Federal Reserve

KIM HWA-YOUNG, KWON JIN-HYUN, SUH JAE-WOONG

Korea’s consumer price index rose to levels never seen before in 2023. But the forecast doesn’t seem so sunny for the new year, as the U.S. Federal Reserve has indicated that it does not plan to lower interest rates any time soon.

Korea’s central bank, in turn, has not been lowering interest rates, citing lingering global uncertainties.

Prices rose by 5.1 percent last year alone, according to the Korean Statistical Information Service. This figure is notably elevated when compared to the historical trend of prices rising by an average of 0.98 percent per year, from 2014 to 2019, before the COVID-19 pandemic.

Bank of Korea Gov. Rhee ChangYong has predicted that the country’s inflation rate will “constantly reach its original goal, 2 percent, but the current and final interest rate, 3.5 percent, could be varying,” based on the high interest rates and high inflation witnessed in 2023.

The onset of the COVID-19 pandemic caused a period of economic stagnation. Assets crashed during this period, and people were forced to reduce their spending. The shift froze the global economy, and even triggered fears of deflation.

Governments worldwide injected money into their economies to encourage spending during the pandemic. But this led to inflation as a side effect, forcing governments and central banks around the world to increase interest rates in order to tame ever-growing price tags.

Other contributing factors, such as the ongoing Russia-Ukraine war, are also taking a toll on the economy. Oil prices were as low as 16 dollars per barrel during the pandemic but soared to around 120 dollars per barrel — a sevenfold increase — within four months of the onset of the war.

The war also triggered a hike in crude oil prices, which was “enough to trigger a recession by itself,” according to David Malpass, president of the World Bank.

In July 2022, the United States saw a 9.1% increase in its consumer price index, while Britain experienced an 11.1% rise in November 2022, indicating ongoing inflationary pressures.

The U.S. Federal Reserve’s rate hikes immediately impacted the global market by causing currencies to appreciate in value, since the U.S. dollar is used as a benchmark for current and future economic growth.

Other countries followed the Fed and raised interest rates in order to strengthen their economies. Korea’s rates are, traditionally, closely tied to those of the United States.

In March 2020, when the U.S. notably cut its interest rate from 1.625 percent to 0.125 percent, Korea followed suit by reducing its interest rate from 1.250 percent to 0.750 percent, according to the Korean Statistical Information Service. In 2022, the United States hiked its interest rate from 0.125 percent to 4.375 percent, and Korea’s interest rate rose from 1.250 percent to 3.250 percent.

Currently, the United States’ interest rate is frozen at 5.375 percent, and Korea’s is stable at 3.5 percent.

BY KIM HWA-YOUNG, KWON JIN-HYUN, SUH JAE-WOONG [hykim25@kis.ac, jhkwon26@kis.ac, jwsuh25@kis.ac]