Was Bank of Korea too hasty in key rate freeze?

• Published date: 02 March 2023
• Publication title: The Korea Times

Bank of Korea Governor Rhee Chang-yong answers questions from reporters during a press conference in Seoul after freezing the key rate, Feb. 23. Joint Press Corps-Yonhap

Rate freeze decision heightens volatility

By Lee Min-hyung

Fears of a widening interest rate gap between the Bank of Korea (BOK) and the U.S. Federal Reserve are rattling financial markets here after what appears to be a "prematurely dovish" decision by the BOK.

The Korean central bank froze its key rate at 3.5 percent on Feb. 23 amid escalating recession fears and a real estate meltdown. But the local financial market reacted sensitively to the BOK's preemptive step over the past week.

A sharp depreciation of the Korean won has particularly surprised market participants. The won-dollar exchange rate closed at 1,297.1 won when the latest rate-setting decision was announced, down 7.8 won from the previous day. But it soared during the next two trading days when the figure rose to 1,323 won per dollar on Tuesday.

The interest rate gap between Korea and the U.S. is also feared to widen further if the Fed increases its benchmark rate by 50 basis points this month. Under that scenario, the gap would widen to a historic high of 1.75 percentage points.

This may end up prompting more foreign capital outflow here. According to data from the Korea Exchange, foreign investors are on a selling spree of Korean stocks in recent weeks. They sold local shares worth 300.3 billion won, a day after the BOK froze the key rate. They also dumped local shares for three consecutive trading days from the day.

The benchmark KOPSI also lost momentum for...