Korea-US rate gap remains as wide as 1.5 percentage points

Acting President Choi Sang-mok speaks at a macroeconomic policy meeting held at the Government Complex Seoul, Thursday. (Ministry of Economy and Finance)
Acting President Choi Sang-mok speaks at a macroeconomic policy meeting held at the Government Complex Seoul, Thursday. (Ministry of Economy and Finance)

With the US Federal Reserve in no hurry to cut its key rate again, the Bank of Korea is likely to slow down on loosening its monetary policy, keeping its guard up against a further devaluation of the local currency.

On Thursday, the US Federal Reserve agreed to hold the target federal funds rate at 4.25 to 4.5 percent, snapping the streak of three consecutive rate cuts last year. Fed Chair Jerome Powell added there would be no rush to cut rates.

The Fed’s latest rate decision pressures the BOK to decelerate the pace of its monetary policy easing. With the Fed hitting a pause in its rate cut cycle, the Korea-US rate gap remained as wide as 1.5 percentage points.

While the BOK held the rate steady at 3 percent in January, it had made two consecutive 0.25 percentage point rate cuts in October and November.

Considering that January’s rate freeze decision was based on the severe depreciation of the Korean won, the BOK will face pressure to maintain the rate at its next meeting in February as a potential rate cut could widen the Korea-US rate gap, encouraging the outflow of foreign capital from Korea and weakening the local currency against the dollar.

Amid the looming uncertainty over US President Donald Trump’s impact on the US economy, the US Fed will maintain a cautious approach, the Korean central bank projected.

"In the press conference following the rate-setting meeting, Powell stressed the need to maintain a cautious approach amid the uncertainties associated with the path of the policy rate," a BOK official based in Washington assessed Thursday.

Yet the BOK’s rate freeze could limit the growth of the local economy, which has been grappling with ongoing political uncertainty sparked by President Yoon Suk Yeol's martial law declaration in December.

The local economy slumped to a 0.1 percent quarterly growth rate in the final quarter of 2024, bringing full-year growth to a disappointing 2 percent, 0.2 percentage point lower than the previous projection of 2.2 percent.

"It would be natural to bring the rate down when only considering the economic circumstances," BOK Gov. Rhee Chang-yong said at a press conference held on Jan. 16, shortly after the BOK decided to keep the rate at 3 percent.

The BOK is set to execute its next rate decision on Feb. 25. It does not hold a rate-setting meeting in March, meaning next month's meeting will be the BOK's only chance to adjust the rate in the first quarter of this year.

In response to the Fed’s rate decision, the top finance policymakers held a macroeconomic meeting Thursday, agreeing to remain vigilant against market volatilities.

"External uncertainties remain high due to the new US government's policy and external policy measures. Each institution needs to remain vigilant and maintain a 24-hour system for monitoring the financial and foreign exchange markets," acting President Choi Sang-mok said, according to a statement released by the Finance Ministry.

By Im Eun-byel (silverstar@heraldcorp.com)