As markets around the world prepare for further rate hikes from the U.S. Federal Reserve, the Bank of Korea issued a warning on Tuesday of “increased volatility.”
“There is a high chance of increased volatility whenever the U.S. Federal Reserve makes a policy rate decision and the global finance and foreign exchange market has to digest it,” according to a text message from the central bank, BOK Governor Rhee Chang-yong.
Powell’s remarks about the U.S. central bank’s intentions to keep raising rates in September, according to Rhee, were “not much different” from South Korea’s position during the central bank’s meeting in August.
However, Rhee stated that the Bank of Korea will “closely monitor the Fed’s decision and its impact at home and abroad.” The Bank of Korea will not alter its existing monetary policy.
Rhee told Reuters last week at Jackson Hole that it was improbable for the BOK to complete its rate-hike cycle before the Fed.
“We are now independent from government, but we are not independent from the Fed,” Rhee informed. “So if the Fed continues to increase the interest rate, it will have a depreciation pressure for our currency.” Rhee then made the following remarks about the increase in interest rates: “Whether we can end earlier – I don’t think so.”
After the benchmark Kospi sank more than 2% on Monday and the Korean won hit its lowest point in more than 13 years, South Korean markets recovered the next day, on Tuesday.
First budgetary reduction in 13 years
The administration of South Korea also declared on Tuesday that it would reduce yearly government spending for the first time in more than ten years.
After two supplementary budgets, the finance ministry presented its first budget proposal for 2023, which at 639 trillion won ($473 billion) was 6% less than this year’s spending. If no further supplementary budgets are announced, this would be the first yearly decrease since 2010.
The country is announcing a “total shift” in its fiscal policy “from expansionary to sound financing,” according to a statement from the finance ministry.