As a rate hike by the U.S. Federal Reserve (Fed) seems imminent, all eyes now are on what impacts it would have on the Korean economy and its monetary policy direction.

According to an analysis conducted by the Maeil Business Newspaper on the U.S. and Korean interest rate trend over the past 16 years, when the U.S. slashed rates, it did not take long before Korea followed suit. It has taken an average of seven months for the Fed’s rate cut to lead the BOK to lower policy rates. But the Korean central bank has waited about 16 months on average before it raised policy rates following its U.S. counterpart’s rate hikes.

“The U.S. rate increase was reflected slowly in the BOK’s policy decision due to concerns over possible adverse effects to the domestic economy - such as the economic slowdown and capital flight,” said Kim Jung-sik, a professor at Yonsei University. “But the U.S. rate cut quickly led to BOK’s rate adjustment as a rake cut can help prop up the Korean economy and there are less concerns over capital flight.”

When the U.S. Fed enacted an emergency interest rate cut in January 2001, the BOK immediately followed the move to cut its rate next month. When the Fed slashed the rate by half of a percentage point from 5.25 percent to 4.75 percent in September 2007 for the first time in nearly four years amid concerns over the mortgage meltdown hurting the economy, then BOK Governor Lee Seong-tae declined to lower the country’s rate considering possible inflation pressures and relatively sound domestic financial market. But in October 2008, 13 months later, the BOK cut the rate when the U.S. rate was slashed its rate to the 1 percent level.

Conventional wisdom is that the domestic interest rate should be kept at higher than that of the U.S., a key currency country, but there were a few exceptions. When the U.S. raised rates in June 2004, the BOK took the opposite direction, slashing its base rate out of fear of the sluggish domestic economy. It was 16 months later in October 2005 that the BOK finally increased the rate when the spread between the two country’s rates widened to 0.5 percentage point. Korean interest rate remained lower than that of the U.S. for two years from August 2005 to August 2007.

The spread between the U.S. and Korean rates narrowed to 0.75 percentage point in June this year, when the BOK conducted a surprising rate cut to a historic low of 1.25 percent.

By Jung Ui-hyun and Boo Jang-won

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]