(Seoul=NSP NEWS AGENCY) = The top of the benchmark interest rate rose to 5.50% as the Federal Reserve System(Fed), the U.S. central bank, took a baby step(25bp increase in the benchmark interest rate at once). As a result, the interest rate gap between South Korea and the U.S. widened by up to 2 percentage points. Currently, Korea’s benchmark interest rate is 3.5 percent.
On the 26th(local time), the Federal Open Market Committee(FOMC) raised the base rate by 0.25 percentage point to 5.25-5.50% per annum.
Fed Chairman Jerome Powell mentioned the possibility of further rate hikes at a press conference held immediately after the FOMC meeting. “The current headline inflation decline is welcome, but core inflation is still quite high,” he said, “For the time being, we think it is appropriate to keep monetary policy at a restrictive level and be ready to raise interest rates further if necessary.
If the interest rate is raised once more at the FOMC in September, the difference in interest rates between South Korea and the U.S. will widen to 2.25 percentage points. Some say that the Bank of Korea should consider further rate hikes.
However, The Governor of Bank of Korea, Lee Chang-yong has made several statements that we should not obsess over the interest rate differential between Korea and the US. At a press conference on the 13th, Governor Lee said, “The exchange rate does not depend only on the difference in interest rates,” adding, “As the semiconductor economy improved, foreign bonds came in and foreign currency supply and demand conditions improved, so the direction of the exchange rate is changing even though the interest rate differential has widened.”
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