Global Tightening Movement Sparks 'Again 2007?'... "Consecutive Rate Hikes Possible This Month and Early Next Year"

Global Monetary Tightening Expected Until Early Next Year... Possible Interest Rate Hike This Month

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jang Sehee] Monetary tightening is expected to continue from November through early next year. The U.S. Federal Reserve (Fed) will hold the Federal Open Market Committee (FOMC) meeting on the 2nd and 3rd (local time) to announce tapering (reduction of quantitative easing), and South Korea is also likely to raise its base interest rate by the end of this month. Experts particularly emphasize that there will likely be one more base rate hike in January or February next year.

Professor Ha Jun-kyung of Hanyang University’s Department of Economics stated on the 1st, "It seems unlikely that the FOMC will deliver any shocking message that overturns previous signals," adding, "The Bank of Korea is also expected to raise the base interest rate this month." Professor Kim Sang-bong of Hansung University’s Department of Economics said, "Considering the continuous rise in inflation and the rapid increase in household debt, a base rate hike this month is inevitable." Consumer prices have exceeded the Bank of Korea’s stability target (2%) for six consecutive months from April to September. The consumer price inflation rate for this month is expected to reach 3%.

Hwang Soon-joo, a research fellow at the Korea Development Institute (KDI), said, "Since the Bank of Korea’s Monetary Policy Committee has continuously conveyed the message that it will raise rates once more within the year, it is highly likely that the rate will be increased at the upcoming Monetary Policy Committee meeting this month." Bank of Korea Governor Lee Ju-yeol also previously indicated a strong possibility of a rate hike in November by stating, "Raising the base rate in November will not pose significant difficulties."

An additional rate hike in January or February next year cannot be ruled out. If the inflation trend continues and household debt growth does not slow, the Bank of Korea could face accountability issues. Professor Ha emphasized, "If the economic recovery continues and inflation expectations rise too much, an additional rate hike early next year is possible." He added, "The upper limit of future interest rates will also be influenced by the degree of inflation." Professor Kim also noted, "Since too much money has been injected, it will be difficult to curb the rapid increase in household debt with quantity regulation alone," adding, "Housing prices are rising, which could further increase inflationary pressures."

However, there are opinions that continuously raising rates this year and next could cause side effects in various areas. Research fellow Hwang emphasized, "If rates are raised rapidly, the risk of defaults, especially among vulnerable borrowers, is expected to increase," adding, "Not only households but also companies could see a deterioration in overall debt quality as delinquency rates and interest coverage ratios rise."

Meanwhile, the market was somewhat unsettled ahead of the FOMC meeting. The won-dollar exchange rate started at 1173.5 won, up 4.9 won from the previous trading day’s 1168.6 won, and was recorded at 1175.2 won at 10:23 a.m. The 3-year government bond yield, a representative market interest rate, also stood at 2.1%. Professor Kim So-young of Seoul National University’s Department of Economics explained, "Since South Korea’s government bond yields tend to move in sync with U.S. bond yields, there is a possibility of further increases."