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(News Focus) Fed's hawkish tone sets stage for BOK's rate hike this year

Economy 14:18 June 17, 2021

By Kim Deok-hyun

SEOUL, June 17 (Yonhap) -- As the U.S. Federal Reserve hinted that it may raise interest rates earlier than previously projected, it could prod the Bank of Korea (BOK) to conduct its first post-pandemic rate hike later this year, analysts said Thursday.

Ending its two-day policy meeting, the Fed's new projections saw at least two rate hikes for 2023, compared with its previous projection of no rate hike before 2024. The Fed also opened discussions about the timing of cutting its monthly bond purchases.

Chairman Jerome Powell said the Fed has yet to decide on when to reduce the stimulus measure, but it raised its inflation forecast for this year.

The Fed's hint of an earlier rate hike, which coincides with rising inflation, is expected to allow the BOK to join global central banks in withdrawing monetary stimulus.

Some analysts said the Fed might begin reducing its bond-buying program in October or November this year after announcing the timing of tapering in August.

"If the Fed reduces the size of bond purchases from November, the bond-buying program will end in 2022. If so, the Fed will raise the interest rate in the second-half of 2023," Ahn Ye-ha, an analyst at Kiwoom Securities, said.

The Fed has said its first step of normalizing monetary policies will be a reduction of its bond purchases.

Bank of Korea (BOK) Gov. Lee Ju-yeol speaks during a press meeting on the central bank's future monetary policies at the BOK headquarters in Seoul on May 27, 2021, in this photo provided by the bank. (PHOTO NOT FOR SALE) (Yonhap)

Ahn Young-jin, an analyst at SK Securities, echoed the view, saying the Fed may announce its decision on tapering in September.

With the Fed's tapering looming, the BOK has also signaled that it will prepare for an "orderly" exit from the pandemic-era monetary easing policy if an economic recovery remains solid.

"If our economy is expected to continue its solid pace of recovery, we will orderly normalize the current easing of monetary policy at an appropriate time," BOK Gov. Lee Ju-yeol said last week.

The timing of normalization will depend on the pace of economic recovery, the situation of COVID-19 and risks of financial imbalances, Lee said.

Shortly after the Fed's policy meeting, BOK Senior Deputy Gov. Lee Seung-heon said the Fed outcome was "more hawkish than expected."

Volatility in financial markets at home and abroad is likely to grow as the Fed hinted that it may raise interest rates at a faster pace than expected, the senior deputy governor said.

The Korean won was trading at 1,129.75 won against the U.S. dollar on Thursday afternoon, sharply down 12.55 won from the previous session's close.

The benchmark Korea Composite Stock Price Index (KOSPI) fell 14.49 points, or 0.44 percent, to trade at 3,264.19 points at one point Thursday.

An electronic signboard in the dealing room of Hana Bank in Seoul on June 17, 2021, shows the benchmark Korea Composite Stock Price Index (KOSPI) and the South Korean currency traded lower, affected by the Federal Reserve's hawkish stance. (Yonhap)

Along with the question of whether the BOK would raise its key rate late this year, market watchers said another question is growing over how fast the BOK would raise interest rates throughout next year in the wake of the Fed's hawkish stance.

"As the Fed opened discussions about tapering, there is no reason for the BOK to delay normalization of monetary policies," a fixed-income analyst said on the condition of anonymity.

The BOK may raise its key rate in October and the next rate hike may come in the first-half of next year, the analyst said.

If so, it would be the second time that the BOK raises interest rates twice within a year. Between July 2010 and June 2011, the BOK raised interest rates twice.

To boost the pandemic-hit economy, the BOK cut the key rate to the all-time low of 0.5 percent in May last year after delivering an emergency rate cut of half a percentage point in March last year.

Last month, the BOK sharply raised its 2021 growth outlook to 4 percent while holding its benchmark policy rate unchanged at a record low of 0.5 percent, as exports showed a strong rebound.

The BOK's February forecast was that South Korea's economy would grow 3 percent this year.

The BOK has raised its forecast on inflation to 1.8 percent this year, compared with its earlier forecast of 1.3 percent.

kdh@yna.co.kr
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