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Korean stocks end with loss on FOMC results
By Lee Min-hyung
The Bank of Korea (BOK) faces a growing dilemma over whether to take another big step of increasing the key interest rate by 50 basis points during the upcoming rate-setting meeting, as heightened recession fears and a credit crunch in the local bond market still come as a serious burden for the central bank's aggressive tightening despite the U.S. Federal Reserve's latest giant rate hike of 75 basis points, experts said Thursday.
The Korean central bank was widely forecast to raise the key rate by half a percentage point again in November amid lingering woes over inflation and a widening rate gap with its U.S. counterpart. Following the FOMC decision, the Fed's key rate rose to a range of 3.75 percent to 4 percent. This widened the gap with that of the BOK to 1 percentage point.
But the once-prevalent outlook is being refuted by economists here, as it remains questionable whether Korea will be able to weather the economic storm in a timely manner amid the ongoing liquidity crisis.
"The BOK will likely raise the benchmark rate by 25 basis points in November and January, respectively, and the peak of the key rate is forecast to reach 3.5 percent," Nomura Securities economist Park Jung-woo said. He also left open the possibility that the upcoming rate hike later this month becomes the last cycle of the ongoing monetary tightening due to multiple risk factors represented by recession and financial volatilities triggered by a Legoland developer's default on debt payments in Gangwon Province.
Other economists also concurred over the possibility of the BOK making only a small increase.
"The BOK will increase the key rate by 25 basis points in November," Korea Investment & Securities economist Choi Jae-min said. "The central bank took a big step in October to respond to the Fed's aggressive rate hikes and the soaring won-dollar exchange rate, but the latest scandal concerning Legoland ended up deepening the liquidity crunch and escalating unrest in the bond market."
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| Federal Reserve Chair Jerome Powell speaks during a press conference after announcing the Fed raised the interest rate by 75 basis points as part of continuing efforts to combat inflation, following the Federal Open Market Committee meeting on interest rate policy in Washington, Nov. 2. Reuters-Yonhap |
Some others, however, still expect a large increase by the BOK, citing lingering inflationary woes.
"Expected inflation is still not on track for stabilization, so it appears too early for the BOK to readjust its monetary stance," said Ahn Jae-kyun, an analyst at Shinhan Securities. "The Fed's hawkish stance is also forecast to stay longer, which comes as a burden for the BOK."
Fed Chair Jerome Powell's hawkish rhetoric overnight ended up widening volatility in stock markets here and abroad. Wall Street plunged after the Federal Open Market Committee (FOMC) meeting Wednesday when the Fed pushed ahead with another giant step. The Nasdaq ended with a loss of 3.36 percent overnight, and the S&P500 also plunged by 2.51 percent.
Korean stocks also widened volatility on Thursday, with the benchmark KOSPI starting with a loss of 1.7 percent. The main bourse reduced the loss by closing at 2,329.17, down 0.33 percent from the previous trading day, on a selling spree by institutional investors.
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