US Inflation Drives 41% of Korean-US Rate Sync

US inflation shocks account for 41% of the synchronization between South Korean and US long-term interest rates. This is the highest contribution among all factors analyzed. The transmission occurs through global price increases. These increases shape expectations for the Bank of Korea's policy rate. This mechanism pushes up South Korean long-term yields.

Researchers from the Bank of Korea's Economic Review Institute published the findings. The study examined daily yield movements in 10-year government bonds. The data covers the period from 2000 to 2025. The analysis identifies the primary drivers of rate alignment between the two economies.

Inflation Shocks Lead Contribution Breakdown

The study uses a Gaussian Dynamic Term Structure Model for its analysis. Global inflation shocks contributed 41% to rate synchronization. Shocks to US long-term rates contributed 22.7%. Federal Reserve monetary policy added 18.3% to the total. US economic conditions contributed the remaining 18%.

The covariance between the two countries' rates surged after the 2008 crisis. It rose again during the 2021 global inflation shock. Volatility in both markets spiked simultaneously during these periods. External shocks caused the rates to move in the same direction. The intensity of this movement increased significantly.

Policy Expectations Drive Rate Movements

The research distinguishes between policy and risk premium channels. US inflation primarily influences South Korean rates via the policy channel. This channel reflects expectations about the central bank's future policy rates. It affects the expectations component of long-term rates. The risk premium channel involves adjustments in investor compensation.

Markets expect the Bank of Korea to align its base rate with the Fed. This expectation drives South Korean long-term rates. Policy rate path expectations exert greater influence than term premiums. Investors demand less compensation for risk when policy paths are clear. The term premium is the additional pay for bearing risk.

Quantitative Easing Impact on Yields

The report estimates the impact of recent global shocks. Without the global inflation shock since 2021, yields would be lower. South Korea's 10-year government bond yield would have been up to 1.5 percentage points lower. The global price surge lifted South Korean rates by this magnitude.

Federal Reserve quantitative easing also affected South Korean yields. Without these policies, yields would have been up to 0.6 percentage points higher. Quantitative easing pulled down long-term rates in both countries. This effect was driven by changes in policy expectations. Both short- and long-term rates declined around announcement dates.