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The Korea Herald
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THE INVESTOR
May 25, 2024

Finance

Korea sighs in relief on US Fed's dovish signal

  • PUBLISHED :March 21, 2024 - 18:08
  • UPDATED :March 22, 2024 - 09:43
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An electronic board shows Korea's main bourse Kospi closing at 2,754.86 points at a newly opened dealing room of the Hana Bank headquarters in Seoul, Thursday, following the US Federal Open Market Committee's decision to maintain the policy rates. (Yonhap)

While the possibility of the US Federal Reserve cutting its base rate three times this year has sent Seoul shares higher, the Bank of Korea is likely to start bringing down its key rate in July, experts viewed.

Through a two-day Federal Open Market Committee meeting, the US Fed maintained its benchmark lending rate to stand in the 5.25-5.5 percent range.

Though the rate freeze had been expected by the market, the global stock market, including that of Korea, rallied as the Fed stuck to its dovish policy roadmap, holding on to its rate outlook despite “sticky inflation.”

The US Fed foresees three cuts in borrowing costs this year, adding up to 75 basis points, which would make the target key rate fall around 4.6 percent by the end of the year.

Buoyed by the outlook and tracking overnight Wall Street gains, Korea's benchmark bourse Kospi skyrocketed, closing at 2754.86 points, up 64.72 or 2.41 percent from the previous session’s close. It was the first time since April 2022 for the index to surpass the 2,750 bar as of closing.

Foreigners and institutions racked up 1.87 trillion won ($1.4 billion) and 1.05 trillion won each on the market, while retail investors dumped 2.91 trillion won.

The secondary Kosdaq market closed at 904.29, up 12.84 or 1.44 percent from the previous closing, passing the 900 mark for the first time since September 2023.

The Fed's dovish stance signaled a green light for the local currency exchange as well. The Korean currency against the US dollar strengthened up to 1,322.4 won at closure, down 17.4 won from the previous day. It was the largest daily fall seen this year.

“The FOMC decision will contribute to the stability of the international financial market," Finance Minister Choi Sang-mok said at a meeting Thursday. The meeting was attended by top Korean financial regulators.

“Close monitoring of the situation is needed as volatility could escalate, considering the discrepancies in monetary policies practiced by major economies.”

As Choi said, Korea is facing a pivot in the monetary policy stances of its economic allies in the coming months.

While the country's policy rate has been standing at 3.5 percent since February 2023, the Bank of Japan has lifted its short-term policy rate for the first time in 17 years on Tuesday and the US Fed is expected to start its rate cut in the summer.

Yet inflation continues to remain a major concern for both the US Fed and the BOK. Fed Chair Jerome Powell and BOK Gov. Rhee Chang-yong have both repeatedly mentioned that inflation's journey back to 2 percent will be a "bumpy road.”

“Rhee has continuously stressed that the evidence of disinflation is crucial for a rate cut decision,” said Seok Byoung-hoon, an economics professor at Ewha Womans University.

Korea’s consumer prices, a key gauge of inflation, advanced 3.1 percent on-year last month. Though the price growth had fallen to 2.8 percent in January, it quickly rebounded back to the 3 percent range within a month.

Snowballing household debts are another hurdle. According to the central bank, local banks' outstanding household loans amounted to a record high of 1,100.3 trillion won as of the end of February, up 2 trillion won on-month.

"The US Fed’s decision is important, too. But the BOK will start the rate cut considering the path of core inflation and the growth pace of household debts,” Seok said. "In light of all these factors, the first rate cut is likely to happen in July.”

Analyst Ahn Ye-ha at Kiwoom Securities viewed that the BOK will bring down the policy rate by 75 basis points to 2.75 percent this year.

“The BOK is likely to begin a rate cut in July, following the Fed’s move in June,” Ahn said.

“The central bank of Korea is projected to bring down the rate by a total of 0.75 percentage points through three rate cuts this year.”

By Im Eun-byel (silverstar@heraldcorp.com)
The Korea Herald

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