South Korea braces for prolonged high rates as US Fed maintains policy
After the US Federal Reserve's decision to maintain its policy rates between 5.25-5.5%, South Korea's Finance Minister Choo Kyung-ho warned on Thursday that high interest rates could persist longer than anticipated, potentially leading to increased global economic uncertainty. The decision by the US Fed sustains the rate gap between South Korea and the US at up to 2 percentage points, with the Bank of Korea's current base rate standing at 3.5%.
Minister Choo's comments came during a meeting with Bank of Korea Governor Rhee Chang-yong and other financial officials. He noted that despite Federal Reserve Chair Jerome Powell's statement that the Fed will consider economic and financial circumstances in determining monetary policy, Powell did not discard the possibility of future rate hikes, suggesting restrictive rates will be maintained until inflation eases.
The median forecasts released on Thursday indicate that Fed officials still see a need for one more quarter-point interest rate hike before the end of this year. In response, the Bank of Korea has pledged to closely monitor the situation. Deputy Governor Lee Seung-heon expressed concern about rising international oil prices, which reached annual highs earlier this week due to production cuts from major oil producers, potentially adding further inflationary pressure on the economy.
Inflation in Korea has been rebounding, with consumer prices growing by 3.4% in August year-on-year, exceeding expectations. This follows a slow day in Korea’s financial market on Thursday, with the benchmark Kospi opening lower than the previous trading day, and the Korean won weakening against the US dollar.
The Bank of Korea is scheduled to hold its next rate-setting meeting on Oct. 19. As the Fed signals an extended period of high rates, market watchers anticipate a hawkish tone from the Bank of Korea, despite Governor Rhee's insistence that Korea does not have to "mechanically" follow the Fed's rate decision.
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