The U.S. Federal Reserve has raised interest rates for the first time in over three years, increasing the burden on the South Korean economy. The Bank of Japan is also expected to raise rates, indicating a coordinated tightening among major economies that could significantly impact exchange rates, prices, and the cost of financing for households and businesses.
On September 16, the Federal Open Market Committee (FOMC) raised the policy interest rate by 0.25 percentage points, from 3.50-3.75% to 3.75-4.00%. This marks the first increase since July 2023, with all 12 committee members voting in favor. Among the 18 members who submitted projections, 16 anticipated further increases by the end of the year.
The robust economy and slow inflation were cited as reasons for the hike. The Fed raised its U.S. growth forecast for the year to 2.3%, an increase of 0.1 percentage points, and also adjusted its personal consumption expenditures (PCE) inflation forecast to 3.7%, up by 0.1 percentage points. The median forecast for the policy rate by the end of next year rose from 3.6% to 4.1%, suggesting a prolonged period of high rates.
Fed Chair Kevin Warsh stated that current financial conditions cannot be considered tight, describing the rate increase as a move to remove some of the accommodative stance. The market interpreted this as a signal for potential further increases, leading to a rise in U.S. Treasury yields and a drop in stock prices following the announcement.
Japan is also expected to join the tightening trend. The Bank of Japan will hold a monetary policy meeting on September 18, where it is likely to raise rates from the current 1% to 1.25%. The anticipation of Japan's rate hike has been prevalent even before the Fed's decision, highlighting the possibility of synchronized tightening.
As a result of this increase, the interest rate gap between South Korea and the U.S. has widened to 1 percentage point based on the upper limit of U.S. rates. The Bank of Korea raised its benchmark rate to 3.00% last month. The higher U.S. rates may enhance the investment appeal of dollar assets, exerting downward pressure on the won. However, actual exchange rates will vary based on the current account balance, foreign investment, and the dollar supply from exporting companies.
Continued depreciation of the won could increase the costs of importing oil and raw materials, adding pressure to domestic prices. Additionally, rising Japanese rates could alter the demand for overseas bonds by Japanese investors and the cost of yen financing, necessitating a close watch on global capital flows.
Households and businesses may feel the impact through market interest rates. If rising U.S. Treasury yields lead to higher domestic bank and corporate bond rates, the costs of loans and refinancing will increase. This could particularly burden borrowers with variable-rate loans or those facing upcoming maturities, reducing their capacity for consumption and investment.
The government's fiscal management may also face challenges. As market interest rates rise, the interest costs for newly issued or maturing government bonds will increase. Prolonged high rates could limit the fiscal capacity for economic response and support for vulnerable groups, making it crucial to manage the timing and volume of bond issuance to control financing costs.
The impact on exports is twofold. Strong U.S. consumption and investment support demand for South Korean products, but prolonged tightening could dampen spending, posing challenges for exports. Consequently, the Bank of Korea must assess the effects of domestic prices and household debt alongside the tightening measures of major economies on the economy and financial markets.
The government believes the immediate shock will be limited. Deputy Prime Minister and Minister of Economy and Finance Ku Yun-cheol held a macroeconomic finance meeting with Bank of Korea Governor Shin Hyun-sung, stating that the market had already priced in the rate hike and that overall financial market conditions remain stable.
However, if excessive concentration occurs in the bond market, the government plans to implement market stabilization measures and may need to supplement support for vulnerable borrowers as necessary. Continuous monitoring of the Fed's potential further rate hikes, as well as monetary policy decisions in Japan and the UK, along with international oil prices and capital flows, will be maintained.
* This article has been translated by AI.
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