The Bank of Korea: "US Interest Rates Likely to Gradually Decrease... Impact Will Grow Larger"

"US Policy Interest Rate Will Gradually Decrease to Neutral Level"
Bank of Korea Releases Monetary and Credit Policy Report

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed) [Image source=Yonhap News]

The Bank of Korea forecasted that the U.S. Federal Reserve (Fed) will gradually lower its benchmark interest rate in the future. It also assessed that the global influence of the Fed's monetary policy has grown stronger than in the past.

On the 14th, the Bank of Korea stated in its Monetary and Credit Policy Report that the expansion of capital market liberalization, foreign exchange market integration, and trade linkages among countries has strengthened the ripple effect of the U.S. Fed's monetary policy compared to before.

The Bank of Korea explained that especially after the global financial crisis, the Fed actively responded to COVID-19 and global inflation, significantly impacting the recent global financial cycle. The Fed's monetary policy has influenced countries through capital flows, exchange rates, risk appetite, trade, and aggregate demand channels as a major driver of global financial and real cycles.

Looking ahead, the Bank of Korea expects the U.S. Fed to gradually lower the policy rate to a neutral level unless an unexpected sharp economic downturn occurs.

If the U.S. Fed cuts the policy rate, global financial conditions are expected to ease, and the real economy is likely to improve. From a financial perspective, the rate cut will act as downward pressure on the dollar, credit spreads, and term spreads, leading to adjustments in global portfolios.

From the real economy perspective, the expansion of U.S. aggregate demand and easing financial conditions are expected to improve the global real economy, with the Bank of Korea emphasizing the possibility of expanded global trade centered on exports and imports of emerging markets with relatively high sovereign credit risk.

The Bank of Korea analyzed that the U.S. policy rate cut will lead to an inflow of global portfolio funds into the domestic market and reduce volatility in the foreign exchange market, thereby alleviating concerns in the foreign exchange sector and gradually expanding the scope for monetary policy to focus on domestic conditions. However, it noted the need to be cautious about the possibility that the Fed's shift to easing monetary policy could hinder the ongoing disinflation and deleveraging processes.

A Bank of Korea official said, "The Fed's monetary easing will reduce the burden on the foreign exchange sector from the perspective of domestic monetary policy," but added, "Since it could increase risks related to disinflation and deleveraging, it is necessary to closely monitor related domestic and international impacts."