BOK ‘Dilemma’ ··· Korea · ‘Unprecedented’ US interest rate differential – Seoul Finance

Fed ‘Hawk’, possibility of big move ↑ 6% final interest rate forecast
Despite slowing employment indicators, Korea-US interest rate gap widens… up to 2.25%p
BOK, which kept interest rates unchanged last month, is likely to resume rate rises in April

[서울파이낸스 신민호 기자] Recently, the central bank’s troubles with the Bank of Korea are deepening. This is because the United States Federal Reserve (Fed · Federal Reserve) has revealed a hawkish stance (which favors monetary tightening), suggesting a ‘major step (0.5%p rate increase)’ this month.

As concerns over the interest rate gap between Korea and the US could widen by more than 2 percentage points, the Bank of Korea’s Monetary Policy Committee, the first among major countries to freeze interest rates, found itself in an awkward position. Currently, the market is anticipating that the BOK will withdraw its wait-and-see position for now and resume interest rate hikes next month.

According to the Chicago Mercantile Exchange (CME) FedWatch on the 9th, 78.6% of market participants in the Federal Funds Rate (FFR) futures market expected the Fed to raise the benchmark rate by 0.5 percentage points at the Federal Open Market Committee (FOMC) this month.. Compared to a week ago (31.4%), this is more than twice as high.

The Fed’s final rate forecast has also been raised. The previous day, 37% of market participants predicted that the Fed would raise the benchmark interest rate to 5.75-6% (in September). Compared to a week ago (12%), it has more than tripled. The possibility of a rate cut within the year has disappeared.

Possibility of a big move in the ‘hawkish’ Fed… Expected final interest rate of 6%

Last week, the most promising final interest rate forecast was 5.25-5.5% (in September). At the time, 40.8% of market participants supported it, and the possibility of a pivot (policy turn) within the year was also discussed within the market.

However, on the 7th and 8th (local time), Fed Chairman Jerome Powell appeared at Senate and House Banking Committee hearings and said, “The Fed’s final rate may be higher, and if necessary , it should rise faster.”

The comments are backed by robust employment data and inflationary pressures. On the 2nd, the US Department of Labor announced that the number of new jobless claims was 190,000, down 2,000 from the previous week.

In addition, the Personal Consumption Expenditure (PCE) index rose 5.4% year on year in January, which is more than the previous month’s increase (5.3%). Following the consumer price index (CPI) and producer price index (PPI) in January, even the PCE index, which the Fed attaches importance to monetary policy, rebounded.

In fact, on the 7th, Powell said, “From a broader perspective, inflation has moderated somewhat since the middle of the year, but it is well above the long-term target of 2%. This is very different from last month. , which was conciliatory, indicating deflation.

As a result, the US 2-year bond yield, which is sensitive to monetary policy, was more than 5%, and the dollar index was approaching the 106 line. The won-dollar exchange rate, which fell to 1296.9 won (based on the closing price) on the 6th, also rising about 30 won to 1324.2 won on the 10th.

A market that has changed rapidly in one day…’obnoxious’ due to the slowdown in employment

However, this possibility of prolonged tightening is being reversed once again. In the Federal Funds Rate (FFR) futures market on the 10th, the possibility of a major move this month was 53.5%, down 25.1 percentage points in one day.

In addition, the possibility of the final interest rate reaching 6% is 14.4% (in September), a drop of 22.6 percentage points in one day. 33.6% of market participants expect a rate cut to begin in December.

This change is due to a sharp rebound in employment indicators ahead of the release of the US February employment report on the 10th (local time).

The previous day, the US Department of Labor announced that the number of new jobless claims filed last week (February 26-March 4) was 211,000, an increase of 21,000 from the previous week. It was much higher than the market forecast (195,000 cases) and was the highest in about 10 weeks. In addition, the February employment report is expected to be more moderate than previously expected.

The high unemployment rate is used as fuel for easing the Fed’s tightening by reducing inflationary pressures from employment. The market assessed that the employment index was still at a solid level, but it was interpreted as slowing down gradually.

Immediately afterwards, the US two-year bond yield, which is sensitive to monetary policy, plunged 3.95% from the previous day to 4.87%, and the dollar index fell from 105.7 the previous day to the line 105.16 current.

Kim Seung-hyeok, a researcher at NH Futures, said, “Uncertainty about employment was detected in the number of new unemployment benefit claims the day before, which led to a sharp drop in US Treasury yields.” “Uncertainty was detected.

Bank of Korea deepening concerns… Additional hike likely due to US tightening uncertainty

Meanwhile, as uncertainty about US monetary policy widens, the Bank of Korea’s Monetary Policy Committee is deeply troubled. Earlier, the BOK Monetary Policy Committee froze the base rate at 3.5% on the 23rd of last month, preventing interest rate hikes. This was the earliest decision to freeze among the major countries of the world.

At the time, BOK Governor Lee Chang-yong explained, “We will maintain the base rate at the current level and closely monitor the pace of inflation deceleration, the final US Fed interest rate level, and the ripple effects of interest rate hikes. so far.”

The problem comes as the possibility of a major move by the Fed emerges this month. Since capital usually follows a higher rate of return, as the gap between Korean and US interest rates widens, the outflow of foreign capital accelerates. This causes a vicious cycle where the value of money earned falls, which increases import prices and increases consumer prices.

For this reason, the MPC BOK has managed the interest rate differential between Korea and the United States to about 1 percentage point, and the wider interest rate differential and the exchange rate were the main ingredients of last year’s intense tightening.

Currently, the base interest rate in the United States is between 4.5 and 4.75 percent, and the difference in interest rates between the two countries is 1.25 percentage points based on the upper limit. However, if the Fed takes a big step at the FOMC this month, the interest rate gap will widen to 1.75 percentage points.

In particular, five out of six members of the Monetary Policy Committee proposed a final rate of 3.75% last month, while the top end of the Fed’s final rate is expected to reach 6%. In fact, the difference in interest rates between the two countries could widen to 2.25 percentage points.

On that day, the prospect of a final interest rate of 6% lost its power as the pressure of the increase in wages due to employment diminished. However, the possibility of a major move this month remains intact, and the final interest rate forecast is kept at 5.5-5.75%. Based on current forecasts, the interest rate differential between Korea and the United States could widen by more than 2 percentage points.

In the end, the market observes that the Bank of Korea will resume raising interest rates at the MPC meeting in April, and that the prospect of the final interest rate will increase in line with the pace of Fed tightening.

The previous day, Vice Governor Lee Sang-hyeong of the Bank of Korea said, “After Chairman Powell’s comments, expectations for an interest rate hike in the United States are growing, and the currency and foreign exchange markets, by including the exchange rate, are affected. .” “We will determine the need for additional progress after considering the indicators, etc.”

Kim Ji-man, a researcher at Samsung Securities, said, “There are still economic indicators to be confirmed, but expectations for a peak in the US base rate have risen enough to justify an additional rate hike in Korea.” It is very likely that it will rise to 10%.”

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