Vice Minister Ki Jae: "US Interest Rate Hike 'In Line with Expectations', Limited Impact on Domestic Financial Market"

[Image source=Yonhap News]

[Asia Economy Sejong=Reporter Kim Hyewon] The government stated that the impact on the domestic financial market from the U.S. Federal Open Market Committee (FOMC) raising the base interest rate on the 16th (local time) is expected to be limited.

Lee Eokwon, First Vice Minister of the Ministry of Economy and Finance, held a macroeconomic financial meeting at the Seoul Banking Hall on the 17th and said, "The recent Federal Reserve (Fed) decision was in line with initial expectations, and with factors such as hopes for negotiations between Ukraine and Russia reflected, the international financial market overnight showed a stable trend with rising stock prices, rising interest rates, and a weakening dollar."

Vice Minister Lee assessed, "Considering that the international financial market absorbed the FOMC results and news related to Russia's default without major difficulties, past experiences during the Fed's monetary policy normalization, current domestic and international financial market conditions, and the fundamentals and creditworthiness of our economy, the impact on the domestic financial market will also be limited."

However, he added, "As global monetary policy normalization continues, if Russia's default becomes a reality, it is difficult to completely rule out the possibility of global liquidity instability occurring during the process."

Vice Minister Lee explained that to prepare for potential dollar liquidity instability, "The forward exchange position limits, which have been relaxed and operated since the COVID-19 crisis, will be maintained at least until the second quarter."

Regarding the government bond market, he said, "If volatility expands significantly, we will proactively implement market stabilization measures in close cooperation with the Bank of Korea." The government plans to respond to potential volatility in the government bond market by adjusting issuance volumes according to timing.

The Fed raised the base interest rate by 0.25 percentage points to 0.25?0.50%, the first increase in 3 years and 3 months, on the 16th. According to the dot plot, an indicator showing future interest rate outlook, the rate is expected to be 1.9% by the end of this year. Vice Minister Lee explained, "The Fed significantly raised its inflation forecast for this year and sharply lowered its growth forecast," adding, "According to the Fed's dot plot, the number of rate hikes increased from 3 to 7 times this year and from 3 to 3.5 times next year."