U.S.-Korea Interest Gap Could Still Widen

Thursday's increase of Korea's base interest rate by just a quarter percentage point to 3.25 percent narrows the gap with the U.S. federal funds rate from one percentage point to 0.75. 

But the U.S. Federal Reserve still has one more policy meeting left next month, and if it raises the rate by 0.5 percentage point, the difference between the two countries will widen to 1.25 percentage points. 

The won is not a key currency like the dollar, and a much higher federal funds rate than Korea's policy rate could prompt investors to leave and weaken the Korean currency further. A drastic fall of the won could result in rising prices of imports, resulting in soaring inflationary pressure.

BOK Governor Rhee Chang-yong said, "I believe not only U.S. interest rate decisions but China's lockdown and the movement of the Japanese yen have a huge effect on the won's value. But I'm worried about the side effects of an excessive gap" between interest rates in Korea and the U.S. 

But the BOK also hinted that it will not raise the base interest rate to more than four percent, raising concerns of a protracted gap between the two countries. There are even forecasts in the U.S. of the rate rising to the five percent level, which means the difference could widen to more than 1.5 percentage points.

Ha Joon-kyung at Hanyang University said, "When there are concerns over macroeconomic stability such as the current account deficit, a protracted interest rate gap poses huge risks." 

Meanwhile the dollar fell on Wednesday when the minutes of the November meeting of the Federal Open Market Committee saying it will "adjust the stance of monetary policy as appropriate if risks emerge." 

The dollar index of the greenback's value against the currencies of six major economies dropped 0.25 percent to 105.81. The won therefore strengthened W23.6 against the dollar to close at W1,328.20, while the Korea Composite Stock Price Index rose 0.96 percent at 2,441.33 points.