Korean central bank expected to pivot to tame inflation, shore up won
New US Federal Reserve Chairman Kevin Warsh holds a press conference at the US Federal Reserve in Washington, Wednesday. (Reuters-Yonhap)
The US Federal Reserve signaled a higher interest-rate path as it kept its benchmark rate unchanged Wednesday, increasing pressure on the Bank of Korea to move toward monetary tightening.
In his debut Federal Open Market Committee meeting, Fed Chair Kevin Warsh kept the target federal funds rate unchanged at 3.5-3.75 percent, but struck a notably hawkish tone, citing continued price pressures.
While the Bank of Korea had already been widely expected to raise its benchmark rate soon, the Fed's hawkish guidance will likely reinforce that expectation, potentially accelerating the pace of monetary tightening.
If the BOK raises the benchmark rate by 0.25 percentage point at its July policy meeting, it would mark the first rate change since May 2025, ending a year-long hiatus.
Over the weeks, BOK Gov. Shin Hyun-song has repeatedly signaled the possibility of tightening the grip on monetary policy. Following a May policy meeting, he said, "the path forward is clear," signaling a rate hike.
Reinforcing that message at an inflation-related meeting Wednesday, he said, "We will take proactive measures until we are confident that inflation will stabilize at the target level."
The firm stance comes amid lingering inflationary pressures, with consumer prices expected to hover around 3 percent in the second half of the year, remaining above the central bank's 2 percent target as elevated oil prices continue to fuel inflation.
The weak won, partly encouraged by the rate differential between Korea and the US, also pressures the BOK to hike the rate. A wider interest rate differential would likely add downward pressure on the won, which has already been under strain against the dollar.
The policy rate gap between the two countries currently stands at 1.25 percentage points based on the upper bound of the Fed's target range. With the Fed signaling a rate hike, should the BOK hold the rate steady, the gap would only widen.
The Korean won was quoted at 1,527.1 per dollar as of daytime trading's close on Thursday, weakening 13.7 won from the previous session, as the greenback strengthened after the Fed struck a more hawkish tone.
Although the won had shown signs of modest appreciation following the US-Iran interim agreement, it quickly reversed course as renewed dollar strength weighed on the local currency.
"The Federal Reserve has signaled the possibility of raising interest rates to address inflationary pressures at its overnight meeting, following recent rate hikes by the European Central Bank and the Bank of Japan," BOK Senior Deputy Gov. Ryoo Sang-dai said at a meeting Thursday.
"A shift in the monetary policy stance of major economies is becoming increasingly visible," he said.
Markets are increasingly factoring in the possibility of two rate hikes by the BOK this year.
"The BOK would raise its benchmark rate in both July and October, lifting the policy rate to 3 percent by the end of the year," said Ahn Ye-ha, an analyst at Kiwoom Securities.
silverstar@heraldcorp.com
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