US Inflation Shocks Drive Synchronization Between South Korea-US Long-Term Rates

An analysis of South Korea-US long-term interest rate synchronization has found that US inflation shocks are the primary driver behind this phenomenon.

The study, published by the Bank of Korea's Economic Research Institute, examined daily yield movements in both countries' 10-year government bonds from 2000 to 2025 and identified a strong correlation between global price increases and expectations about South Korea's policy rate.

The researchers found that during periods of global economic shocks, such as the 2008 financial crisis and the COVID-19 pandemic, the covariance between South Korean and US long-term rates surged, indicating that both countries' interest rates moved in the same direction with greater intensity.

The analysis revealed that global inflation shocks contributed approximately 41% to South Korea-US long-term rate synchronization, followed by US long-term rate shocks at 22.7%, Federal Reserve monetary policy at 18.3%, and US economic conditions at 18%. The study also found that the policy channel was the primary transmission mechanism for external shocks affecting South Korean long-term rates.

The researchers emphasized that while synchronization is an inevitable phenomenon resulting from global economic shocks, its magnitude can be reduced through effective communication with the market. They noted that if expectations about the Bank of Korea's policy rate path are managed appropriately, the phenomenon of South Korea-US long-term rate synchronization can be partially mitigated.