The Bank of Korea Says "Significant Perception Gap Between the Fed and Markets... Possibility of Increased Financial Volatility"

Bank of Korea Governor Lee Chang-yong and BIS Economic Advisor and Head of Research Shin Hyun-song are having a discussion at the 1st Bank of Korea-Korea Chamber of Commerce and Industry Joint Seminar held on the 1st at the Korea Chamber of Commerce and Industry in Jung-gu, Seoul, on the theme of "Changes in the Economic Paradigm and Korea's Economic Response Measures." Photo by Hyunmin Kim kimhyun81@

The Bank of Korea explained that despite the Federal Reserve's (Fed) policy rate hike, expectations for the end of the rate hike cycle are growing in the market, stating, "There is still a significant difference in perception between the US Fed and the market regarding inflation and policy paths," and added, "We cannot rule out the possibility of increased volatility in the global financial markets during the upcoming expectation adjustment process."

On the morning of the 2nd, the Bank of Korea held a market situation review meeting chaired by Deputy Governor Lee Seung-heon to assess the international financial market situation following the Federal Open Market Committee (FOMC) results and the potential impact on domestic financial and foreign exchange markets.

The Bank of Korea evaluated that the 0.25 percentage point policy rate increase at this FOMC meeting was in line with market expectations.

It further explained, "Although the policy statement maintained the phrase 'ongoing increases' for future continuous rate hikes, Chairman Powell's remarks were perceived by the market as dovish (favoring monetary easing), leading to a decline in interest rates and a rise in stock prices."

Chairman Powell stated, "To reach a sufficiently restrictive level, a couple more increases are necessary," emphasizing again the need to maintain a tightening policy for the time being.

The Bank of Korea pointed out, "Uncertainties remain regarding the development of risk factors such as the reduction of global liquidity, changes in expectations about the policies of the European Central Bank and the Bank of Japan, and fluctuations in international commodity prices like oil due to China's economic reopening."

It added, "Since domestic financial and foreign exchange markets may also experience increased volatility due to these external conditions, we will closely monitor market situations such as exchange rates and capital inflows and outflows, and take preemptive and proactive market stabilization measures if necessary."