Finance Ministry calls for vigilance in wake of Fed's rate freeze

Economy

Published: 21 Mar. 2024, 16:41 Updated: 21 Mar. 2024, 19:22

Finance Ministry calls for vigilance in wake of Fed's rate freeze

Finance Minister Choi Sang-mok chairs a meeting in central Seoul on Thursday following the U.S. Fed’s decision to maintain the federal funds rate steady in a range of 5.25 percent to 5.5 percent. [NEWS1]

Korea’s Finance Ministry noted potential market volatility amid diverging monetary policy directions in major economies following the U.S. Federal Reserve’s decision to hold the rates steady for the fifth straight meeting.

Finance Minister Choi Sang-mok said financial authorities need to enhance monitoring and timely responses to the monetary policies of different countries, including the United States and Japan, as they may expand market volatility.

Choi made the remarks in a meeting held in central Seoul on Thursday to assess the impact of the Fed’s decision on the financial and foreign exchange markets. Also in attendance were Bank of Korea Gov. Rhee Chang-yong, Financial Services Commission Chairman Kim Joo-hyun and Financial Supervisory Service Gov. Lee Bok-hyun.

The Kospi rallied 2.41 percent on Thursday while the won strengthened 1.3 percent.

The U.S. Fed on Wednesday held the federal funds rate at a range of 5.25 percent to 5.5 percent, postponing a cut and maintaining the rate at its highest level since 2001 amid stubborn inflation.

Fed Chair Jerome Powell noted progress in the fight against inflation and a strong labor market.

“Inflation has eased notably over the past year but remains above our target rate of 2 percent,” Powell said. “We are prepared to maintain the current target range for the federal funds rate for longer if appropriate” as slashing interest rates too rapidly would risk a rebound in inflation.

However, the Fed stayed on track for three rate cuts this year.

On the contrary, the Bank of Japan hiked its interest rate for the first time in 17 years on Tuesday, ending a streak of negative rates after decades of deflation.

Choi said potential risks related with real estate project financing (PF) loans are sufficiently manageable, despite the rising default rate due to a persistently high interest rate, and noted that secondary financial institutions like savings banks have adequate total loss-absorbency capacity.

The default rate for PF loans in the financial sector is in the high 2 percent range.

“For an orderly soft landing, we will preemptively make preparations for necessary measures,” said the finance ministry. It pledged to expand the guarantee for PF loans and accept more companies applying for government support funds for the normalization of PF projects.

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