Ahead of the Monetary Policy Committee on the 24th, the Bank of Korea Faces Complex Calculations

US March Interest Rate Hike Expectations Diverge... Uncertainty Grows

[Asia Economy Reporter Seo So-jeong] The Bank of Korea is deeply deliberating whether to raise the base interest rate ahead of the Monetary Policy Committee meeting scheduled for the 24th. This is due to increasing uncertainty as market experts have differing forecasts on the scale of the US interest rate hike in March.

On the 3rd, the Bank of Korea held a 'Situation Review Meeting' chaired by Deputy Governor Lee Seung-heon to assess the international financial market situation during the Lunar New Year holiday period and discuss its potential impact on the domestic financial and foreign exchange markets.

Deputy Governor Lee stated, "Although the international financial markets showed generally stable conditions during the Lunar New Year holiday, uncertainties remain high due to factors such as the acceleration of major countries' monetary policy normalization and geopolitical risks involving Russia and Ukraine. Market volatility may increase depending on the release of economic indicators such as inflation and employment in major countries." He emphasized, "We will not lower our guard and will continue to closely monitor the development of global risks and their impact on the domestic financial and economic sectors."

According to the Bank of Korea, from the 31st of last month to the 2nd, during the Lunar New Year holiday period, global risk aversion eased in the international financial markets, leading to rises in major countries' stock prices and interest rates, while the US dollar weakened. Major stock markets rose significantly due to improved corporate earnings and inflows of bargain buying following recent sharp corrections.

With the Monetary Policy Committee's policy direction meeting scheduled for the 24th, the Bank of Korea plans to carefully monitor the US situation and adjust the pace of interest rate hikes accordingly. The calculation has become more complex recently as Federal Reserve Bank presidents have continued to comment on the number and magnitude of US rate hikes. Statements dismissing the market speculation of a 0.50 percentage point hike in March have been emerging one after another.

Patrick Harker, President of the Philadelphia Federal Reserve Bank, said in an interview with Bloomberg TV on the 1st (local time), "I expect four rate hikes of 25 basis points (1bp=0.01 percentage point) each this year," expressing a negative view on the possibility of a 0.5 percentage point rate hike in March. James Bullard, President of the St. Louis Federal Reserve and a prominent hawk within the Fed, also said in an interview with Reuters on the same day, "I do not think a 50bp rate hike would be helpful at this time," adding, "It is still undecided how far rates need to be raised."

The US Federal Open Market Committee (FOMC) regular meetings are scheduled for March, May, June, July, September, November, and December. Accordingly, some market forecasts suggest that the number of US rate hikes, previously expected to be up to seven times after FOMC meetings, may be limited to around three to four times.

The market's focus is on the Bank of Korea's options in deciding monetary policy this month ahead of the US rate hike in March. Experts foresee that continuous rate hikes domestically are inevitable amid strong pressures on exchange rates and inflation due to US tightening fears. However, opinions differ on whether to raise rates again in February.

Professor Sung Tae-yoon of Yonsei University's Department of Economics diagnosed, "It is true that there is a burden regarding consecutive rate hikes in February, but the Korean won continues to depreciate and inflationary pressures are intensifying, increasing the necessity for a rate hike." He added, "Even if rates are not raised, there are factors such as quantitative tightening (QT) that could cause the currency value to fall," noting, "Concerns about the domestic economy and fiscal soundness are also emerging among foreign investors."

On the other hand, Professor Kim Jin-il of Korea University's Department of Economics said, "Although there is a forecast that the US will raise rates at every meeting this year (a total of seven times), this scenario assumes that inflation will not be controlled," and predicted, "About four hikes are expected this year."