The South Korean government has begun reviewing measures to support vulnerable borrowers and small and mid-sized importers, preparing for a prolonged tightening stance even after the U.S. Federal Reserve held its benchmark interest rate. The aim is to preemptively prepare measures to ease financial costs and respond to currency volatility risks, as the trend of rate hikes in major economies could lead to rising domestic market rates and the burden of a strong currency.
Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol held an expanded macroeconomic and financial meeting at the Government Complex Seoul on Wednesday. "As internal and external risk factors persist, including expectations of rate hikes in major economies and uncertainty in the global artificial intelligence (AI) economy, we will maintain particular vigilance," he said. Koo added, "To minimize the impact on people's livelihoods from high interest rates and a strong currency, we will preemptively review support measures such as easing financial costs and responding to currency volatility risks for vulnerable borrowers and small and mid-sized importers."
The meeting was held to review the outcome of the U.S. Federal Open Market Committee (FOMC), which convened in the early hours Wednesday Korea time, as well as financial and foreign exchange market trends related to the war in the Middle East. The meeting was attended by Bank of Korea Governor Shin Hyun-song, Financial Services Commission Chairman Lee Eok-won, and Financial Supervisory Service Governor Lee Chan-jin.
The Fed unanimously held its policy rate at the FOMC overnight. The upper bound of the policy rate was maintained at 3.75%. However, the rate path projection in the dot plot rose to reflect the possibility of a hold or hike, after having signaled a possible 25-basis-point (1bp=0.01 percentage point) cut in March. The median value of the Fed's dot plot for this year was raised from 3.375% in March to 3.75% in June. The projection for next year also rose from 3.125% to 3.625%.
Koo assessed, "At this meeting, the first FOMC since Chairman Warsh took office, the Fed emphasized its commitment to achieving price stability while refraining from specific remarks on the direction of future rate adjustments." Global financial markets took the FOMC outcome as hawkish. The yield on the two-year U.S. Treasury note rose 13bp and the 10-year yield rose 4bp, while the Dow Jones index and the S&P 500 index fell 1.0% and 1.2%, respectively. The dollar also strengthened 0.7%.
The government views rate hike moves in major economies such as the Bank of Japan (BOJ) and the European Central Bank (ECB) as potential burdens on the domestic financial market. Meeting participants agreed on the need to closely analyze the impact of changes in major economies' monetary policies on domestic market rates and vulnerable sectors. In particular, they decided to prepare measures to ease the burden on vulnerable borrowers stemming from rising domestic rates.
Small and mid-sized importers, which face a heavy burden from the strong currency, were also included as support targets. The won-dollar exchange rate rose from 1,483 won at the end of April to 1,539 won on the 5th of this month before falling to 1,513 won on the 17th, but remains at a high level. The government plans to review measures to respond to currency volatility risks for companies facing simultaneous increases in import costs and financial cost burdens amid high exchange rate volatility.
Middle East risk was assessed as easing somewhat. "With news of the conclusion of ceasefire negotiations between the United States and Iran, volatility in the domestic financial and foreign exchange markets is easing somewhat," Koo said. "If geopolitical tensions ease and energy supply and demand stabilize, the major uncertainty in our economy is expected to gradually dissipate." However, he added, "We must not let our guard down until tangible improvements such as the opening of the Strait of Hormuz and the stabilization of oil prices become visible."
The government will also pursue structural improvements to reduce foreign exchange market volatility. Koo mentioned plans such as gradually converting offshore non-deliverable forward (NDF) transactions into deliverable forward (DF) transactions, stating, "We will swiftly flesh out structural improvement tasks to fundamentally ease the volatility of our financial and foreign exchange markets."
The government also decided to operate an integrated risk management system encompassing not only the stock, bond, and foreign exchange markets but also the property market. This is based on the assessment that as linkages between asset markets have grown recently, instability in one market is more likely to spread to others. "The ripple effects of sector-specific risks on the economy and financial markets as a whole are expanding," Koo said. "We will operate a more integrated risk management system to detect risk factors early and respond preemptively."
