Fed Rate Uncertainty Deepens as Middle East Tensions Fuel Inflation Fears

On Wednesday (U.S. time), the Federal Reserve kept its benchmark interest rate unchanged at the 3.5-3.75 percent range for the second consecutive time while maintaining its projection of one rate cut this year.

At a press conference following the decision, Fed Chair Jerome Powell said the surge in oil prices has increased inflationary pressures, signalling a cautious stance on the timing of further rate cuts, reports Yonhap news agency.

"Following the outcome of the Federal Open Market Committee meeting, uncertainty over the Federal Reserve's monetary policy path has increased further, while external risk factors, including ongoing instability in the Middle East, continue to persist," Bank of Korea (BOK) Deputy Gov. Yoo Sang-dai said while presiding over a market assessment meeting.

"We will remain on high alert and closely monitor the development of both internal and external risk factors and their impact on the markets and the economy," Yoo said, vowing to take "timely market stabilisation measures" if necessary.

Given the Fed's stance, the BOK is expected to maintain its prolonged rate pause.

At its latest policy meeting in February, the BOK kept its key rate unchanged at 2.5 percent, marking the sixth consecutive hold, as it seeks to support financial stability amid a weak won and to help cool the overheated real estate market.

Currently, the policy rate gap between South Korea and the United States stands at 1.25 percentage points, and experts warn that a wider gap could trigger foreign capital outflows and further weaken the Korean won.

The local currency has fallen sharply against the U.S. dollar since the start of the U.S.-Israeli conflict with Iran earlier this month, breaching the psychologically and technically significant 1,500 won threshold during intraday trading this week.

- IANS