Hawkish Powell gives impetus for Bank of Korea to hike key rate again

Hawkish Powell gives impetus for Bank of Korea to hike key rate again

From left are Bank of Korea Governor Lee Ju-yeol and U.S. Fed Chairman Jerome Powell. AP-Yonhap

By Lee Min-hyung

U.S. Fed Chairman Jerome Powell’s “surprisingly” hawkish turn is expected to provide an impetus for the Bank of Korea (BOK) to deliver another key rate hike early next year despite renewed fears of a slowdown in the economic recovery here triggered by the Omicron variant of COVID-19 that could be potentially resistant to current vaccines, according to economists, Wednesday.

After increasing the benchmark rate to 1 percent last week, BOK Governor Lee Ju-yeol hinted at another hike in the months to come by saying that the nation’s key interest rate was “still accommodative.”

With Powell signaling the Fed’s willingness to accelerate its tapering moves by purchasing more treasury bonds, the economists said the BOK had been given more leeway in its push for monetary tightening and policy normalization.

The Fed had, in recent months, maintained an ultra-careful approach in the timeline of tapering and rate hikes; therefore, the BOK was facing some difficulties on whether or not to take an “independent step” in handling the country’s benchmark rate.

Such uncertainty, however, is being cleared away after Powell shared his plans to “wrap up asset purchases a few months sooner” amid escalating inflationary pressure there in the United States. Powell’s hawkishness is based on his thinking that the U.S. economy was looking strong and inflationary pressure was already high.

The financial authorities here are keeping a close watch on how the Omicron variant will impact the financial market and the economy, which the economists believe will affect the BOK’s next rate decision. The central bank wants Korea to achieve 4 percent economic growth this year.

Its monetary policy board is scheduled to hold its next rate-setting meeting Jan. 14; but a general consensus from the market is that the bank will raise the rate by 0.25 percentage points by Feb. 24 at the latest when the second meeting will be held.

Despite growing expectation over an earlier-than-expected rate increase, some analysts say that downside risks associated with the possible spread of the Omicron variant may affect the pace of the BOK’s policy normalization.

Samsung Securities economist Kim Yong-koo said the Omicron factor would continue to add downward pressure on the local equity market with the possibility of the Fed pursuing its scheduled tapering and early rate hikes.

“The focus should be on taking control of the spread of the Omicron variant and allaying concerns over the Fed’s faster tapering and early rate hikes,” he said.

Investors should be wary of widening volatility on the stock markets, as the KOPSI is vulnerable to such external uncertainties on a near-term basis, according to Kim.

Governments across the globe may introduce tightened quarantine rules once again at a time when the global economy is embracing living with the coronavirus strategies.

Korea’s daily COVID-19 infection cases topped 5,000, Wednesday, for the first time since the country began grappling with the pandemic early last year, according to data from the Korea Disease Control and Prevention Agency.

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