Bank of Korea Headquarters, 16th floor, Monetary Policy Board conference room.
In this place, boasting a security system on par with the National Intelligence Service, CNN news was flowing quietly from the screen.
The Monetary Policy Board members gathered in one place all wore dark expressions, as if by agreement.
[Breaking news - Post covid & FED!]
Post-COVID.
These days, the greatest concern for central banks was none other than this post-COVID era.
The economic stimulus measures unleashed during COVID were slowly returning as side effects, and the first blow had been the devastation of U.S. consumer prices.
“...”
“...”
The board members’ faces were especially grim because of the Federal Reserve’s giant step the previous week.
Contrary to the Fed’s announcement that inflation would peak in November and then subside, U.S. prices showed no signs of being brought under control. As a result, interest rates had soared faster than Usain Bolt, and fears of recession were increasingly descending on Wall Street.
Then how on earth were they supposed to respond?
“Sorry I’m late. I had a National Assembly schedule this morning.”
When Bank of Korea Governor Sin Huiseop entered, the CNN broadcast was turned off.
“Let’s skip the news we already know and begin the meeting.”
“Yes.”
“Last week, the Fed carried out a giant step. With that, the U.S. benchmark rate is 3.25%... one step higher than ours.”
“...”
“I’d like each member to speak freely on how we should respond in monetary policy.”
No sooner had he finished speaking than one hawkish member raised his hand.
“We don’t even have time to agonize over it. Naturally, we have to raise rates.”
He lifted a report.
“The fact that the Fed pushed ahead with a rate hike even at the risk of the SB collapse is tantamount to admitting its failure in price management. Beyond that, it has been signaling additional rate hikes through various channels. That means there is still room for further increases.”
The hawkish member spoke with near certainty.
And understandably so, because no matter which indicator one looked at in the United States, inflation was not something that would be easily tamed.
“To be honest, we’re already late. After the Korea-U.S. interest rate gap reversed due to the last giant step, the exchange rate has currently shot up to 1,250 won. We can’t just sit by any longer. At this Monetary Policy Board meeting, we need to carry out at least a big step to stabilize the exchange rate.”
Korea’s current benchmark rate was 3.0%. One step lower than the United States.
But the U.S. benchmark rate was effectively the world’s benchmark rate, so Korea needed to be at least one step higher than the U.S., or at the very least equal to it. Otherwise, the exchange rate would break through 2,000 won.
“...My thoughts are a little different.”
Once the hawkish member finished speaking, a dovish member said in a voice that nearly crawled into his throat.
“Of course, I acknowledge that the Fed failed in price management. But the current Korean economy doesn’t have the basic stamina to withstand high interest rates. The most worrying part is real estate. The majority of household loans are mortgage loans, and if rates rise like this, we’ll see a Korean version of the subprime crisis unfold.”
At this, the hawkish members fully revealed their displeasure.
-Governor. If we weigh every single circumstance like that, how can we possibly raise interest rates? The Bank of Korea isn’t a bank that protects the housing market, is it?
-That’s right. If the U.S. interest rate stance is like that, we have to keep pace with it even if it tears us apart. We can’t raise the exchange rate to 2,000 won just to prevent a real estate slump.
The dovish members fired back as well.
-Now that I’m listening, what you’re saying sounds rather strange. It’s not as if we’re doing this to save construction companies.
-If the real estate market crashes and the economy contracts, it’ll be no different from the IMF crisis in effect. First, we should turn the real estate sector from a hard landing into a soft landing, and then it won’t be too late to raise rates afterward.
At that, all the hawks rose up.
-Does that make any sense? I’m telling you, U.S. rates have already surpassed Korean rates. Are you trying to make the exchange rate 2,000 won!
-I’m saying that’s not all there is to it. Judging from multiple indicators, it’s all right for U.S. rates to be a little higher for now. The exchange rate can still endure.
-I have absolutely no idea what basis you have for saying that, Member Kim. If buying dollars, the safest money in the world, pays higher interest, who would hold won?
-Blind faith in the dollar like that is what caused the SB incident. You know it hit 900 won during the subprime crisis, don’t you? This is an issue that needs to be approached through comprehensive indicators, not one that can be explained by a simple interest rate gap.
As the heated back-and-forth continued, Governor Sin quietly closed his eyes.
At present, he felt like the mother with one son who sold umbrellas and another who sold salt.
If he raised rates in step with the U.S., he could hear the groans of citizens who had barely managed to buy homes of their own; if he left them as they were, he could see companies groaning under surging prices and rising raw material costs.
“Enough, everyone.”
After a long silence, he opened his mouth.
“...As you know, I’m someone who came from the IMF. I know a little about situations like this.”
Putting his credentials to the fore, he turned his head slightly toward the dovish side.
“Member Kim. How much do we currently have in foreign exchange reserves?”
*
At eight in the early morning, before work had even begun, all employees of the pension fund were busily polishing their reports.
The reason they were especially diligent today was the meeting chaired by the division head that would be held in an hour.
Division Head Park Seongcheol was the persistent type who, if he didn’t understand something, would keep asking until he did. Because of that, whenever a meeting chaired by the division head was scheduled, even the lowest-ranking employees were thrown into chaos preparing grounds and supplementary materials. He was notorious for tearing into even the junior staff if he didn’t like a report.
[Post-COVID: The Pension Fund’s Interest Rate and Currency Response Strategy]
As everyone expected, today’s seminar topic was interest rates.
Indeed, it was no exaggeration to say that the current concern of every central bank and sovereign wealth fund in the world was interest rates.
The Fed’s record-breaking rate hikes, inflation that still refused to be contained... With the United States, the central bank of the Earth, making unprecedented moves day after day, those working in finance had no choice but to become sensitive.
Just how long would the United States continue to raise rates? And according to that, how would global stock markets be affected?
“Hey, Sleep-Talker.”
As I was hurrying toward the conference room with my materials in hand, a familiar voice called out to me.
“Ah, good morning, Director.”
“Did you sleep enough last night? Did you have coffee this morning?”
“...Yes.”
“Why does your answer sound so weak? Don’t tell me you’re going to doze off in front of the division head too?”
“N-no, sir. I’m perfectly clear-headed today.”
Director O patted my shoulder and said,
“Good. The division head is keeping a close eye on you, so you’d better stay sharp.”
“The division head is... watching me?”
“Yeah. I reported to him that among our employees, there’s one guy who passes out whenever there’s a meeting.”
Director O looked at my face, which had flushed bright red, and smiled.
“I’m joking. The report you submitted—I reported it to the division head too. After reviewing it, he was surprised at how you predicted the SB incident in such detail.”
“Ah... Thank you.”
“Let’s keep doing well from now on.”
“Yes... I’ll work hard.”
Leaving behind words that I couldn’t tell were a threat or a compliment, Director O leisurely disappeared.
Watching him go, I made up my mind.
Today, I would absolutely not cause any trouble whatsoever.
*
-Next is the outlook for the domestic stock market due to the U.S.-driven rate hikes. Domestic Team Director Kim Myeongcheol will give the presentation.
The seminar that continued for about an hour did not greatly deviate from everyone’s predictions. The majority expected that the United States would raise rates further. Opinions were divided on where the endpoint would be, but the differences were not large.
There also wasn’t much disagreement about the impact this would have.
If interest rates rose in the United States, the central bank of the world, the aftereffects would reach all of North America, Europe, and Asia. Accordingly, both the Strategy Department and the Risk Management Department predicted that interest rates in each country would rise steeply, and that bonds and stock markets would undergo a strong correction.
-Good morning. I am Director Kim Myeongcheol, in charge of domestic equities and bonds.
The presentation from the Domestic Team, the final presenters, was not very different either.
-...Taking all of this into account, I believe the Bank of Korea’s Monetary Policy Board has already decided on a rate hike. A strong correction in the KOSPI is inevitable. Accordingly, I believe the most desirable course is to sell off domestic stock market assets and increase the portfolio share of safe assets such as deposits and short-term bonds.
When all the presentations had ended, the division head’s face darkened.
“So you’re saying that right now, across all regions—North America, Europe, and Asia—there are concerns about a stock market slump?”
-Yes, that is correct.
“And the real estate market in particular looks the most dangerous?”
-Yes. The Fed’s pace of rate hikes is too fast.
When interest rates rise, it is bad news for stocks and a disaster for real estate.
Because while few people in this world borrow money to invest, almost no one buys a home without debt.
Indeed, as the recent high interest rate trend continued, an unprecedented cold wave had struck the presale price market, which had once seemed to know no ceiling.
Only a year ago, the real estate myths of “Gangnam never falls” and “Seoul is invincible” had been widespread among the public. But now that the bubble had burst, apartments in Seoul and Gangnam were racing toward being cut in half.
“Fine. Even to me, the real estate cold wave doesn’t look like it will go away easily. Real Estate Investment Office, what’s the current situation?”
-Yes, prices have fallen enough for the cold wave to be felt.
“What about losses?”
-But we still have no losses. The price drop is relative to the peak, so we are actually sitting on nearly double the profit.
“Then even if we make a decision, there’s nothing for us to lose, is there? Focus on selling off assets in risky regions and secure cash holdings.”
-Yes, understood.
The decision to sell real estate was made easily, but when the division head looked at the stock team, he hesitated for a moment.
“Do both the Overseas Team and Domestic Team think the same? That we should dispose of stock assets and increase the ratio of safe assets?”
-Yes. That is correct.
-Europe and Korea will both have higher rates than the U.S. They’ll raise them more and faster than the Fed.
-In the current situation, I think even short-term bonds may be risky assets. Holding cash seems the safest.
The division head turned his head toward the back.
“Does everyone think the same? I’d like to hear the opinions of the working-level staff submitting reports too.”
The conference room sank into a long silence.
Of course, for a sovereign wealth fund, holding cash was a helpless act that was practically the same as taking a loss just by staying still. But with interest rates around the world about to run wild, there was no fool who would suggest buying something.
“Really, no one...”
Just as the meeting was about to end like that.
The division head’s eyes caught sight of a young man raising his hand in the very back row.
When the division head pointed to him, the young man rose from his seat with a shy expression.
“Ah, yes. I’m Assistant Manager Lee Sejun from the Overseas Team.”
“Uh, all right. Why did you raise your hand? Do you have a different opinion?”
“Yes... It’s just that everyone has said the interest rates in Europe and Asia will be higher than the U.S., but I don’t think that will happen.”
At the bombshell statement, the heads of all the fund managers snapped around.
“What?”
“...I don’t think rates will rise like they do in the U.S. Therefore, I don’t think the impact on each country’s stock market will be that large either.”