Former Deputy Minister of Economy and Finance Kim Yong-beom "Concerns Over Domestic Real Estate and Consumption Contraction Due to US Tightening"

September FMOC 'Giant Step' Outlook
Reversal of Korea-US Interest Rate Gap Confirmed
Monetary Policy Emphasizes Economy Over Exchange Rate
"Current Exchange Rate Greatly Affected by Economic Fundamental Concerns"
Household Debt and Real Estate Market Instability Highlighted as Economic Vulnerabilities

[Asia Economy Reporter Hwang Yoon-joo] Kim Yong-beom, CEO of Hashed Open Research (HOR) and former First Vice Minister of the Ministry of Economy and Finance during the Moon Jae-in administration, expressed his opinion on the tightening stance, stating that "the Monetary Policy Committee members of the Bank of Korea will have to make the most important and difficult decision during this year's meetings."

On the night of the 18th, Kim stated on Facebook, "Considering the prospect of interest rate hikes, the cooling effect on our country's real estate market and domestic demand is more concerning than the exchange rate."

This is interpreted to mean that domestic monetary policy should be decided by considering economic resilience rather than just the interest rate inversion between the two countries.

The U.S. Federal Reserve (Fed) will hold the September Federal Open Market Committee (FOMC) meeting on the 21st (local time). The market is taking a 75bp (1bp=0.01%P) hike as a given. If a giant step (75bp hike) occurs, the U.S. benchmark interest rate will rise from the current 2.25?2.50% to 3.00?3.25%.

In this case, it will surpass South Korea's benchmark interest rate (2.50%), causing an interest rate inversion phenomenon to recur. Since the U.S. has raised rates four times since March, the interest rates of the two countries were inverted for about a month from the end of July. Generally, South Korea's benchmark interest rate is higher than that of the U.S.

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the regular Monetary Policy Committee meeting held on the 25th at the Bank of Korea in Jung-gu, Seoul. / Photo by Joint Press Corps

The Bank of Korea will also hold a Monetary Policy Committee meeting on October 12 to decide the magnitude of the benchmark interest rate hike. Due to the three-week time difference between the interest rate decision periods of the two countries, the foreign exchange market is already showing significant volatility. On the 16th, the won-dollar exchange rate surged to 1399.0 won during the Seoul foreign exchange market session. This is the highest level in 13 years and 5 months since March 31, 2009.

The unusual surge in the exchange rate due to the dollar's extreme strength is not unique to Korea. On the 14th, the yen-dollar exchange rate in Japan rose to 144.96 yen during the session, approaching the psychological resistance level of 145 yen. The euro-dollar exchange rate is also at its lowest level in 20 years.

Kim Yong-beom pointed out, "The magnitude of the interest rate hike significantly affects the exchange rate," but added, "The current exchange rate seems to be more influenced by concerns about the current account trend and economic fundamentals than by the interest rate differential between Korea and the U.S."

On the 14th, in a real estate-dense shopping area in Songpa-gu, Seoul, where the decline in real estate prices and the transaction freeze phenomenon continue, apartment listings with market prices are posted. Photo by Kang Jin-hyung aymsdream@

The reason Kim Yong-beom mentioned domestic economic resilience amid the interest rate hike stance is interpreted as a concern that the recent focus on the 'exchange rate' might overlook economic vulnerabilities such as household debt.

He graduated from Seoul National University with a degree in economics and began his public service career by passing the 30th Administrative Examination. While serving as Vice Chairman of the Financial Services Commission (July 2017?May 2019), he managed household debt issues, and as the First Vice Minister of the Ministry of Economy and Finance (August 2019?March 2021), he oversaw macroeconomic policy.

Recently, he published a book titled "Turmoil and Balance," which reflects the sense of crisis he felt during his tenure, including the Korean government's response in the early stages of COVID-19. It is significant that this orthodox economic bureaucrat voiced his opinion at a critical time.

The global economic organization presented a similar analysis to Kim Yong-beom. According to the "Korea Economic Report 2022" released by the Organisation for Economic Co-operation and Development (OECD) on the 19th, household debt and real estate prices were cited as risk factors.

As of last year, Korea's household debt-to-disposable income ratio was 206.6%, ranking fifth among 26 major countries. The OECD pointed out, "The high level of household debt, combined with high inflation and monetary tightening (interest rate hike stance), increases economic vulnerability and is a factor that dampens domestic demand."

The economy next year is likely to be more challenging than expected. The OECD revised Korea's gross domestic product (GDP) growth rate to 2.8% for this year and 2.2% for next year. Compared to the June forecast, this year's growth rate was raised by 0.1%P, but next year's growth rate was lowered by 0.3%P. The consumer price inflation rate is expected to be 5.2% this year and 3.9% next year, which are 0.4%P and 0.1%P higher than the previous forecasts, respectively.