After a tie in ‘Twinkle’ in August, they reversed again
As it is certain that the US Federal Reserve will raise the key interest rate by 0.75 percentage points at this month’s monetary policy meeting, an inversion of the base rate between Korea and the US is inevitable.
If the central banks of both countries raise their key rates as market expectations in the future, it is expected that interest rates will remain inverted until at least the end of this year, except for some periods in which they are tied.
◇ If the US is sure to raise 0.75%p in July… interest rate inversion begins
According to foreign media on the 17th, the Federal Open Market Committee (FOMC) meeting on the 27th is expected to raise the key interest rate by 0.75 percentage points.
The possibility of a 1 percentage point higher than this was briefly raised due to the ‘surprising’ rise in consumer prices in the US in June, but then the trend was solidified with a 0.75 percentage point increase after the Fed hawks (preferring monetary tightening) supported a 0.75 percentage point increase.
St. Louis Federal Reserve Bank President James Bullard, a leading hawkish figure, said in a recent interview with Japanese media that he still prefers a 0.75 percentage point increase, and Fed Director Christopher Waller also supports the plan at an event in Victor, Idaho. said.
Cleveland Fed President Loretta Mester said in an interview with Bloomberg TV that there was no need to raise it below 0.75 percentage points, but declined to respond immediately when asked if a 1 percentage point increase would be considered.
In an interview with the New York Times, San Francisco governor Mary Daley, who is moderate, said that she favored a 0.75 percentage point increase the most.
As the ‘blackout’ period, during which Fed officials remain silent on interest rate policy ahead of the FOMC meeting, began on the 16th, a 0.75 percentage point increase is the consensus among Fed officials.
Market forecasts were similar.
According to FedWatch, which estimates the probability of a change in the Fed’s monetary policy based on the price data of the Federal Funds Rate (FFR) futures, which is the base rate, the Chicago Mercantile Exchange (CME) group, the probability of a 0.75 percentage point increase (71%) is 1 percentage point. It was overwhelmingly higher than the raise (29%).
The 0.5 percentage point increase was not in the market’s mind.
Initially, the agenda for this policy meeting was a 0.5 percentage point increase or a 0.75 percentage point increase.
That’s because Federal Reserve Chairman Jerome Powell said at a press conference held after the FOMC meeting last month that the two proposals would be considered at the July meeting.
Even at that time, the market’s outlook was favorable for a 0.75 percentage point increase.
◇ ROK-U.S. interest rate inversion continues at least until the end of the year
If the Fed moves as expected by Fed officials and the market, the US benchmark interest rate will rise from 1.5-1.75% to 2.25-2.5% on the 27th.
This is 0-0.25 percentage points higher than the current base rate of Korea (2.25%), which means that the base rate of the US and Korea is inverted.
However, if the Bank of Korea raises an additional 0.25 percentage point at the Monetary Policy Direction Meeting on the 25th of next month, the base rate of the US and Korea will be the same.
At a press conference held after the regular meeting of the Monetary Policy Committee (Monetary Policy Committee) on the 13th, Lee Chang-yong, governor of the Bank of Korea, said, “I think it is desirable to gradually raise the interest rate by 0.25 percentage points (p) for the time being if the price flow does not deviate significantly from the forecast path.” has said
Of course, this does not mean that the BOK said it would raise the key interest rate at all three meetings of the Monetary Policy Committee this year.
If interest rates need to be raised in the future, this means that the rate will be raised by 0.5 percentage points, that is, not a ‘big step’ but a normal increase.
Nevertheless, the general view of the market is that the BOK will raise it by 0.25% at all remaining meetings.
For example, investment bank JP Morgan predicted that the Bank of Korea would raise the base interest rate by 0.25 percentage points three times to 3.0% at the end of the year.
Even with such a hike by the BOK, it will be difficult to break away from the rate inversion trend.
This is because the prevailing view is that the Fed will raise the key interest rate by 0.5 percentage points at its September meeting.
In that case, the interest rate will reverse again within less than a month after the US-Korea base rate was tied.
After that, the reversal will be maintained until at least the end of the year.
This is the result of applying the market’s expectations of the extent of the Fed’s rate hike by 0.75 percentage points in July, 0.5 percentage points in September, 0.25 percentage points in November, and 0.25 percentage points in December.
This was predicated on the assumption that the US benchmark interest rate would reach 3.25-3.50% at the end of the year, in line with the forecast of 3.4% presented by the Fed in the dot chart.
However, this premise has recently been shaken.
This is because there is an argument that the year-end base rate should be higher than this, considering the inflation shock.
In a recent online seminar hosted by the European Economic and Financial Center, Bullard said that the key interest rate should be raised to 3.75 to 4 percent by the end of the year to contain ‘obstinately high inflation’.
In this case, the interest rate gap between Korea and the US could widen further.
[표] Korea-U.S. Base Rate Trend Forecast
┌────────┬──────────┬─────────┬───────┐
│ Monetary Policy Date │ Fed │ Bank of Korea │ Interest Rate Difference │
├────────┼──────────┼─────────┼───────┤
│July 13th (Korea) │1.50~1.75% │2.25%(+0.5%p) │ 0.50~0.75%p│
├────────┼──────────┼─────────┼───────┤
│July 27 (USA) │2.25~2.50%(+0.75%p) │2.25% │ -0.25~0.00%p│
├────────┼──────────┼─────────┼───────┤
│August 25th (Korea) │2.25~2.50% │2.50%(+0.25%p) │ 0.00~0.25%p│
├────────┼──────────┼─────────┼───────┤
│September 21 (USA) │2.75~3.00%(+0.5%p) │2.50% │ -0.50~-0.25%p│
├────────┼──────────┼─────────┼───────┤
│October 12 (Korea) │2.75~3.00% │2.75%(+0.25%p) │ -0.25~0.00%p│
├────────┼──────────┼─────────┼───────┤
│November 2nd (USA) │3.00~3.25%(+0.25%p) │2.75% │ -0.50~-0.25%p│
├────────┼──────────┼─────────┼───────┤
│November 24th (Korea) │3.00~3.25% │3.00%(+0.25%p) │ -0.25~0.00%p│
├────────┼──────────┼─────────┼───────┤
│December 14 (USA) │3.25~3.50%(+0.25%p) │3.00% │ -0.50~-0.25%p│
└────────┴──────────┴─────────┴───────┘
/yunhap news
