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| Janet Yellen, U.S. President Joe Biden's nominee for treasury secretary, speaks as Biden announces nominees and appointees to serve on his economic policy team at his transition headquarters in Wilmington, N.C., Dec. 1. Reuters-Yonhap |
Interest rate under upward pressure due to US pump-priming measures
By Lee Min-hyung
The inauguration of U.S. President Joe Biden will induce changes in Korea's currency market and the central bank's low interest rate stance, but the level of changes will depend on how fast the coronavirus spread subsides here and abroad throughout 2021, market experts said Thursday.
However, they said most market indices here have already adjusted in line with expectations on Biden's promised economic stimulus plans, so chances remain slim that any drastic changes will be seen due to his presidency.
Specifically, the U.S. dollar is theoretically expected to weaken against the Korean won, as his stronger sets of pump-priming measures will push investors to prefer risky assets from a medium-term viewpoint. The interest rate here is also likely to be raised in a slow yet steady manner, on Biden's super-expansionary fiscal policies and hopes for the commercialization of virus vaccines.
"The outlook for the dollar's weakening remains in place amid the U.S. government's plan to expand dollar liquidity," DB Financial Investment analyst Park Sung-woo said.
"But it remains unclear whether the trend will last for a longer period of time, as one noteworthy change following the election was the rise in the interest rate on U.S. treasury bonds, which increased the likelihood of a dollar rebound."
Given the lingering uncertainty, the economist said the dollar's value appears unlikely to continue weakening throughout 2021. Biden's market stimulus hopes raised the yield on the 10-year U.S. Treasury note above 1 percent early this year, which pushed the won-dollar exchange rate up to over 1,100 won per dollar from this year's low of 1,082.5 won on Jan. 4.
But starting this week, the exchange rate is on the decline amid widening preference for risky assets following U.S. Treasury Secretary nominee Janet Yellen's remarks to support Biden's strong stimulus drive.
Regarding the key interest rate, the general consensus is that the benchmark rate will remain unchanged here throughout 2021 amid lingering fears of the spread of COVID-19. Bank of Korea (BOK) Governor Lee Ju-yeol reiterated the bank's position to maintain the record-low level "for the time being" due to the dismal condition of the virus-hit local economy.
U.S. Federal Reserve Chairman Jerome Powell also reaffirmed his determination to keep the country's benchmark rate at the near-zero level "for the foreseeable future," saying that any plans for a hike will come "no time soon."
But the interest rate here is expected to keep facing upward pressure over the longer-term, as the pandemic shock is widely expected to come to a possible end by late 2021 or early 2022 on hopes for development of reliable vaccines by then.
Korea Capital Market Institute economist Hwang Sei-woon said any discussion on whether to raise the interest rate would start around the time when the Fed begins discussing bond tapering.
"The Fed's upcoming tapering talks will bring impacts on major economic indices here in the area of stocks bonds and currency markets," he said. "The Fed has reiterated its willingness to keep the near-zero interest rate until 2022, so chances remain slim that any big changes will happen from the U.S. authorities' monetary policy drive in 2021."
In a report, Hana Institute of Finance also expected the BOK to keep the key rate frozen until the end of the year, and the Fed's tapering discussion to start sometime early next year.
