Korea-US Interest Rate Synchronization Driven by Global Inflation Shocks

The synchronization between Korean and US long-term interest rates is driven by global inflation shocks, according to a new analysis. Researchers at the Bank of Korea found that when a global inflation shock occurs, markets form expectations that the central bank will adjust its benchmark interest rate in step with the Federal Reserve.

This expectation drives domestic long-term rates, making it difficult for the Korean economy to respond independently to external shocks. The researchers estimated that absent the global inflation shock since 2021, the yield on Korea's 10-year government bond would have been up to 1.5 percentage points lower than it in fact was.

The study also found that even when the Fed is conducting unconventional monetary policy, the dominant channel of Korea-US rate synchronization remains policy expectations. The researchers urged active market communication to manage expectations and ease the degree of synchronization.