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| Bank of Korea Governor Lee Ju-yeol Korea Times file |
Short-term rates will remain under control, long-term rates to face upward pressure
By Lee Kyung-min
The Bank or Korea (BOK) will be able to push its expansionary monetary policy for the next three years, gaining room to maneuver after the U.S. Federal Reserve clearly signaled the policy rates will be kept at "near-zero" until at least 2023.
The Fed's decision to keep the benchmark federal funds rate unchanged at 0.00-0.25 percent will help Korea's central bank leave the record-low key base rate of 0.5 percent unchanged for the next few years, a monetary policy needed for the economy to recover amid growing fears of sharper-than-expected contraction in 2020 brought on by the COVID-19 pandemic.
Experts say the short-term low interest rate in the market will stay under control as a result, while it will take time to see when long-term rates will be lowered.
According to a September policy statement and economic projections released Wednesday (local time), U.S. Fed officials expect to leave interest rates near zero until at least 2023, and plan to tolerate higher inflation for some time as part of continued efforts to help the labor market and economic recovery.
The policy-setting Federal Open Market Committee said in its statement that it "expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time."
The eased monetary policy reflects overall economic activity remaining well below its pre-pandemic level, compounded by the path ahead remaining highly uncertain.
"Effectively, we're saying rates will remain highly accommodative until the economy is far along in its recovery," U.S. Fed Chair Jerome H. Powell said at a news conference following the meeting.
Seoul National University professor of economics Kim So-young said, "The Fed's decision is of most importance to Korea when setting policy rates due to reasons of foreign capital outflow among others. Short-term rates will be kept stable in line with the central bank's measures, but it remains to be seen how long it will take for the long-term rates to be brought down."
Korea University professor of economics Kim Jin-ill, who worked at the U.S. Federal Reserve Board for 10 years, said the Fed's decision was largely expected and will have no more greater impact on the BOK's rate-setting decision than previously thought.
"Of course the near-zero policy by the Fed helps the BOK more than it hurts. But no dramatic expectations should be drawn because the low policy rate was well expected due to economic crisis brought on by the COVID-19 pandemic," he said.
The BOK lowered the key base rate by 75 basis points after the pandemic, once on March 17 to 0.75 percent, down 50 basis points, and on May 25 to 0.5 percent, down 25 basis points from 0.75 percent.
