S. Korea's benchmark interest rate likely to reach 4% after Fed hints at continuing rate hikes

By Park Sae-jin Posted : March 9, 2023, 15:54 Updated : March 9, 2023, 15:54

[Photograph by Yoo Dae-gil = dbeorlf123@ajunews.com]

SEOUL -- South Korea is likely to increase its base interest rate to up to four percent, after the United States Federal Reserve Chairman Jerome Powell stated during his speech on March 7 that "the ultimate level of interest rates is likely to be higher than previously anticipated," on Capitol Hill.
According to South Korean monetary authorities on March 8, Chairman Powell strongly suggested the need for additional tightening when he addressed the Senate Banking, Housing and Urban Affairs Committee. Since March 2022, the Fed has raised its benchmark interest rate from 0.00~0.25 percent to 4.50~4.75 percent, an increase of 4.5 percentage points. Despite steep rate hikes to lower inflation, it has not significantly impacted inflationary pressures, leading to a need for further tightening.
In light of Powell's recent remarks, the possibility of the Fed taking a big step, the process of raising the benchmark interest rate by 0.5 percentage points at once, at the upcoming Federal Open Market Committee (FOMC) meeting on March 22 has increased. According to the Fed Watch tool from the Chicago Mercantile Exchange (CME), the possibility of the Fed raising taking a big step at this meeting increased by over 35 percentage points, from 31.4 percent to 70.5 percent in just one day.
As the Fed's hawkish stance grows stronger, it is expected that the final interest rate in the U.S. will also rise. At the FOMC meeting in December 2022, the Fed set the final interest rate at 5.1 percent (5~5.25 percent, with a midpoint of 5.1 percent). However, some experts predict that this level could be reached with just one big step and the final interest rate could rise to the mid-5 percent range, or even as high as 6 percent.
The problem is that the Fed's actions are likely to have a significant impact on South Korea's benchmark interest rate. Currently, the domestic benchmark interest rate is at the 3.5 percent level and the final interest rate has been forecast to be between 3.5 percent and 3.75 percent. Bank of Korea Governor Lee Ju-yeol had previously stated that "although the Bank of Korea's Monetary Policy Board (MPB) decided in February to hold the interest rate, five out of the six MPB members indicated that the final interest rate could be raised to up to 3.75 percent per year."
Since the benchmark interest rate will not be determined at this month's MPB meeting, many experts predict the MPB will decide to increase the benchmark interest rate by at least 0.25 percent points Governor Lee also said about MPB's decision in February that "I hope that MPB's decision does not be interpreted as meaning that the rate hikes have ended."
The Korea Economic Research Institute also predicted that the base interest rate at the end of this year could rise up to 4 percent due to the U.S. interest rate hike and unstable domestic inflation.
Samsung Securities economist Huh Jin-wook predicted that the Bank of Korea is likely to raise the base interest rate by an additional 0.25 percentage points in April as the Fed's final rate adjustment is expected to be higher than the market's previous expectations.
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