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Dovish Fed good for markets, Korean financial authorities say

Published: 04 May. 2023, 16:51 Updated: 04 May. 2023, 16:54

Finance Minister Choo Kyung-ho, right, and Bank of Korea Gov. Rhee Chang-yong at a meeting held in Incheon Thursday following the Federal Reserve's decision to up the federal funds rate by 25 basis points Wednesday. [YONHAP]

Indications that U.S. rate increases will be halted for now are a big plus for Korea's financial and foreign exchange markets, Korea financial regulators and the country's central bank said Thursday.

They did warn of the need to continue monitoring the market closely in case of a rise in uncertainties.

"Concern for high inflation persists and the expansion of the recurrence of uncertainties in the global financial market and real economy cannot be excluded," said Finance Minister Choo Kyung-ho and the chiefs of the Bank of Korea, the Financial Services Commission and the Financial Supervisory Service in a statement Thursday following the Fed meeting.

The regulators said the flows in the stock and corporate bond markets are favorable, citing a gradual fall in the yield of corporate bonds and commercial paper. But they noted a concerning yield gap and a potential movement in the market triggered by the market disruptions.

"We will strengthen monitoring of the domestic and global financial markets" and "inspect weaknesses."

Yields for Korea's three-year corporate bonds (AA-) fell to 4.09 percent as of Wednesday from 5.26 percent on Jan. 2. Those for commercial paper were down to 3.97 percent from 5.28 percent in the same period.

"Uncertainties in the future monetary policy remain high as the gap between the potential in the change of the policy direction this year and the Fed stance remains," said Lee Seung-heon, senior deputy governor at the Bank of Korea during a separate meeting Thursday.

"Volatility in the financial market inside and outside of the country could expand," he added.

The meetings followed the Federal Reserve's 25 basis points increase in the policy rate Wednesday, a unanimous decision that brought the federal funds rate to a range of 5.00 to 5.25 percent.

It is the 10th increase in 14 months, taking the rate to the highest levels in 16 years.

The Fed signaled the Wednesday decision may be the last raise for now.

"We're no longer saying that we anticipate" additional interest rate increases, Federal Reserve Chair Jerome Powell said during a press conference following the rate announcement.

He said the banking turmoil since March appears to be "resulting in even tighter credit conditions for households and businesses."

He added that the committee will take into account cumulative tightening of monetary policy and the lags with which monetary policy affects economic activity and inflation in determining what additional policy firming may be appropriate to return inflation to 2 percent over time.

"Our future policy actions will depend on how events unfold."

"Powell did not entirely rule out the chance of additional increases, but the rate increase cycle is seen to have ended," wrote Lim Jae-kyun, an analyst at KB Securities, in a report Thursday.

The Bank of Korea kept its policy rate unchanged at 3.50 percent in the past two meetings.Its next Monetary Policy Board meeting is scheduled to take place on May 25.

Bank of Korea Gov. Rhee Chang-yong said Wednesday it's too "premature" to discuss rate cuts, citing core inflation that's sticky and remains above 4 percent.

The Kospi traded flat on Thursday while the won strengthen 1.15 percent to the dollar from the day before.

BY JIN MIN –JI [[email protected]]