Fed's reduction of bond purchases not rattling Bank of Korea

The Bank of Korea on Thursday said the recent decision by the U.S. Federal Reserve to start tapering the pace of asset purchases from later this month aligned with market expectations.

Bank of Korea's headquarters in central Seoul [YONHAP]

The Bank of Korea on Thursday said the recent decision by the U.S. Federal Reserve to start tapering the pace of asset purchases from later this month aligned with market expectations and that global financial markets remain stable despite the announcement.

“The decisions by the Federal Open Market Committee [FOMC] was mostly aligned with market projections,” said Park Jong-seok, deputy governor of the Bank of Korea in a meeting held Thursday to discuss on the effects of changes in the global financial markets. “However, as there are still uncertainties regarding the pace of tapering and the timing of interest rate hikes [in the United States] we will have to closely monitor policy changes.”

Park added that the bank will try to stabilize the local financial market through bond purchases if needed, after monitoring changes in consumer prices and policy directions in major economies.

The Fed decided to start tapering bond purchases later this month during the latest FOMC meeting that ended Wednesday. The plan involves reductions of monthly bond and mortgages-backed securities purchases by $15 billion from the current $120 billion of purchases a month.

The Fed started signaling such a decision from earlier this year, reducing impact on the market.

The Fed decided to keep its interest rate unchanged at the near zero level of between 0 and 0.25 percent. Fed Chairman Jerome Powell said during a post-meeting briefing that beginning to reduce the pace of asset purchases should not be taken as a signal that rate hikes are imminent.

“We don’t think it’s time yet to raise interest rates,” Powell said.

The Fed also described inflation to be “transitory” while adding that it is expecting supply-chain bottlenecks to persist well into next year along with inflation, but as the pandemic ends the bottlenecks will abate and inflation will decline.

Korea has been faster than the U.S. in terms of raising interest rates.

The Bank of Korea raised the country’s base rate by 25 basis points to 0.75 percent in August. Since then, the bank has been signaling that another rate hike this year could be possible if the economy continues to grow and inflation persists. There is one remaining rate setting meeting this year on Nov. 25.

Gov. Lee Ju-yeol had said after the latest monetary policy board meeting in October that “the board agreed to decide on an additional rate hike after monitoring how global risks and the country’s financial imbalances affect the local economy."

Currently, the country’s financial regulators are concerned with mounting household debt, which reached 1,806 trillion won ($1.5 trillion) as of the second quarter this year, a new record.

BY KIM JEE-HEE [kim.jeehee@joongang.co.kr]