Further hikes in the BOK are inevitable in response to aggressive tightening notices
Chairman Jerome Powell has foretold intense austerity. [AFP=Yonhap]
The era of zero interest rates in the US, which had been maintained for nearly two years after the COVID-19 pandemic, has ended, and the era of austerity has begun. In a statement issued after the two-day Federal Open Market Committee meeting on the 16th, the US Federal Reserve announced that it would raise the key interest rate by 0.25 percentage points, from the current 0.00-0.25%.
Some in the market predicted a “big step” to raise 0.5 percentage points, but chose a small increase because of the Russian invasion of Ukraine. The Fed raised interest rates for the first time in three years and three months since December 2018.
The Fed said in a statement that “inflation has risen due to increased inflationary pressure” and that the “Ukrainian war is likely to put further upward pressure on inflation”.
The specific schedule for tightening was also disclosed through the dot chart for interest rate hikes. FOMC members expected the rate to be at 1.9% by the end of the year. In the remaining six meetings, all hinted at a rate hike. The interest rate level at the end of 2023 is predicted to be 2.75%. This means that there may be three or four rate hikes next year.
Even with the balance sheet shrinking, Chairman Jerome Powell said he would “start in May as early as possible.” When it comes to strength, he predicts that it will be much more aggressive than in 2017-2019. The primary objective of the Feds monetary policy is price stability. “Without price stability, we cannot achieve sustained maximum employment,” Powell said. “Our plan is to restore price stability while maintaining a strong job market.”
As the Fed heralds an era of aggressive austerity, the BOKs calculations have also become complicated. Since Korea has already raised its key interest rate three times since August last year, there is no need to rush to raise the interest rate as if being chased. However, as the Fed expects the rate to be 1.9% at the end of this year, it should be raised from the current base rate. In the minutes of the Monetary Policy Committee in February released on the 15th, 4 out of 6 members of the Monetary Policy Committee also mentioned the need for an additional rate hike.
Monetary policy variables may include the slow process of appointing a successor to the Bank of Korea Governor Lee Ju-yeol, whose term ends in March, and Im Ji-won, a member of the Monetary Policy Committee of the Bank of Korea, ending in May. It is because the observation that it will not be easy to raise the base rate in a situation where the governor is vacant is raising his head. In the past, there has never been a meeting of the Monetary Policy Committee in a situation where the position of the governor was vacant.