Fed's decision gives Bank of Korea more leeway

Fed's decision gives Bank of Korea more leeway

The Bank of Korea (BOK) has been given more leeway in its monetary policy after the U.S. Federal Reserve's decision to freeze the benchmark rate at near zero through 2022, economists said Thursday.

The Fed did not display any willingness to slash the rate to negative territory, and instead, decided to keep the rate at a range of zero to 0.25 percent for more the next two years.

Experts said the BOK would continue to freeze its key interest rate at 0.5 percent, as the Fed's decision is not "surprising enough" for the Korean central bank to make big changes in its currency policy.

"My view is that the Fed's decision will have a limited impact here, and a series of other external uncertainties ― such as the coronavirus shock and the reviving U.S-China trade war ― are much more crucial issues determining any possible changes in Korea's benchmark rate," said Kang Hyun-ju, head of macro-financial analysis at the Korea Capital Market Institute.

But it is true that the BOK has been given more room to slash the rate further after the Fed's announcement to maintain the rate for a relatively long period of time, according to him.

Chances are the Korean central bank could cut the rate by 25 basis points sometime in the near future due to the aforementioned risk factors, the economist said.

"But the BOK is likely to follow the lead of the U.S. Fed by freezing the rate providing external uncertainties do not escalate to a worrying level," he said.

Yonsei University economist Sung Tae-yoon also said the BOK would likely keep the status quo following the Fed's move.

"The BOK will maintain the current rate in line with the Fed's decision, but chances are the central bank may push for an additional rate cut if the economic condition does not take a turn for the better," he said.

Eugene Investment & Securities analyst Shin Dong-soo expected the BOK to freeze the rate until the end of 2020 unless the Fed reverses its decision and cuts the rate further.

"The Fed did not make any announcements over the possibility of cutting the rate to negative territory," he said. "Against the backdrop, the BOK is also unlikely to slash the rate further."

BOK Deputy Governor Park Jong-seok also said the Fed's decision would be of help for the BOK to conduct more flexible monetary policies.

"If the Fed maintains its monetary easing policy for a long period of time, this will help stabilize the global financial market," Park said. The positive impact will also help the BOK handle monetary policies down the road, he said.

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