Freezing Key Rate
The Bank of Korea (BOK) unanimously froze the benchmark interest rate at 1.5 percent per year in a Monetary Policy Committee meeting on April 12. In a press conference shortly after the meeting, "As interest incentives have increased recently, short-term investment funds have been received," said Lee Joo-yeol, the governor of the Bank of Korea. "If the current strong Korean won continues, it can become a factor in decreasing a possibility of an interest rate hike.
Analysis said that the governor’s remarks meant that if the Korean won continues to stay strong, coupled with discussions on disclosing foreign exchange interventions with the United States, a thaw on the Korean Peninsula such as the scheduled inter-Korean Summit and an influx of foreign funds among others, pressure for a consumer price risk will weaken and may slow down the speed of an interest rate hike.
In the market, a forecast is strengthening that the interest rate which was originally expected to be hiked twice this year will be hiked once. Despite a low interest rate, economic growth is weak and pressure for a run-up in consumer prices remains low. In fact, the BOK lowered its forecast on inflation to 1.6 percent from 1.7 percent set in its economic outlook on 2018.
Employment remains sluggish, staying at a shocking level. In January, the BOK predicted that the number of employed people would increase by 300,000 this year, but, this time pulled it down to 260,000 by taking into consideration a rise in minimum wage, a delay in restructuring, and a slow recovery in the number of foreign tourists to Korea such as those from China.
Uncertainties outside Korea such as the US-China trade war and the Syrian crisis, are also factors that prevent an interest rate hike. "The US-China trade will not reach an extreme situation, but not stop completely, either," BOK governor Lee said.
However, if the US’s benchmark interest rate hike is accelerated, it is unlikely that the BOK will maintain its basic policy to freeze the interest rate. According to the March minutes of the Federal Open Market Committee (FOMC), members said, "Prices in the coming months may reach the target (2%) and economic growth may become faster than expected." The US media predicted that "the minutes are somewhat hawkish," and interest rate hikes might increase from three to four.
There is concern that if the Fed raises the interest rate three times and the Bank of Korea (BOK) maintains its interest rate freeze, the chasm between the interest rates of Korea and the US widens to 1 percentage point, a big outflow of funds is highly likely to take place. "If the gap between the interest rates of the two nations further widens, the BOK will have to raise the interest rate against its will," said Sung Tae-yoon, a professor of economics at Yonsei University in Seoul. "The BOK should increase power for an interest rate hike by raising the Korean economy's growth rate quickly."