Largest Ever
The interest rate gap between Korea and the United States widened to a record high as the U.S. Federal Reserve took the baby step of raising its key interest rate by 0.25 percentage points. As the possibility of overseas capital outflows increased due to the widening of differences in interest rates, the Bank of Korea began to worry even before the start of a Monetary Policy Committee meeting in April.
The Fed put out a statement after a regular meeting of the Federal Open Market Committee (FOMC) on March 22 (local time). In the statement, it said that it will raise the base rate by 0.25 of a percentage point from the current 4.50-4.75 percent to 4.75-5.00 percent.
Until the beginning of March, the possibility of the big step of raising the base interest rate by 0.5 percentage points at once was strong as an inflation trend was solid and various economic indicators were strong. However, with the collapse of small and medium-sized U.S. banks following the bankruptcy of Silicon Valley Bank (SVB) in the United States, the increase of 0.5 of a percentage point seems to have been replaced by an increase of 0.25 of percentage point. In addition, Fed Chairman Jerome Powell made it clear at a press conference that he will continue to raise the benchmark rate until the end of 2023.
The Korean standard interest rate was 3.50 percent per annum on the day. As a result of the FOMC decision, the difference in interest rates between Korea and the U.S. widened to 1.50 percentage points. This is the largest gap in 22 years since May-October 2000. When the interest rate spread widens, the risk of capital outflow to overseas markets where interest rates are generally higher increases.
However, some analysts say that the Fed’s baby step reduced pressure on the Bank of Korea (BOK) to raise its own base rate. The BOK clarified its position that it will confirm the effect of mitigating inflation following a rate hike while freezing the base rate in February. Accordingly, some experts predict that the April MPC meeting will also freeze the basic rate, but whether or not the Fed takes a big step has been pointed out as a variable. This means that the Fed’s decision gave the BOK room to breathe.
At the BOK’s next MPC meeting to be held on April 11, the inflation rate in March is expected to act as a variable in determining the basic rate. If the inflation rate rises higher than the BOK’s forecast of the early 4 percent range, concerns will grow, experts say.