What does the Fed rate hike mean for Korea?
December 14, 2016
What will higher interest rates mean for Korea?
December 14, 2016 | Washington, DC
Below, please find an official statement from Kyle Ferrier, KEI's director of academic affairs and research on the Fed's decision to raise interest rates and its impact on Korea.
Kyle is available for interviews. To arrange an interview, please contact KEI's director of communications, Jenna Gibson, at jg@keia.org.
The Federal Reserve announced today that it is raising interest rates from .5 percent to .75 percent, with three more gradual increases expected in 2017 contingent upon market conditions. What are the implications of this decision for Korea?
- The Bank of Korea (BOK) Monetary Policy Board is scheduled to meet tomorrow to determine key interest rates in Korea. The Fed’s decision will put pressure on the BOK, especially as it comes during a period of higher consumer prices. However, because inflation remains well below the 2 percent target and the Korean economy is forecasted to grow at only 2.4 percent next year, a BOK rate increase tomorrow is unlikely.
- Structural issues in the Korean economy compounded by a continued slowdown in global trade will make it difficult for the BOK to raise rates, resulting in a divergence of U.S. and Korean rates. If Korea can use fiscal stimulus to boost sluggish domestic demand, they could avoid some of the problems brought on by the rate hike.
- The Korean won continues to fall against the dollar after the news of the U.S. rate increase. As long as interest rates are unequal, 2017 will see a weaker won.