Local stock, forex markets respond calmly to Fed's rate hike
By Yoon Ja-young
The central bank governor said Thursday that the reversal of key rates between Korea and the United States will have a negligible impact on the financial market. The stock and foreign exchange markets also responded calmly to the U.S. Federal Reserve's rate hike.
The main KOSPI index closed at 2,496.02 points, up 0.44 percent from the previous day, little affected by the rate rise in the U.S. The Korean won closed at 1,072.7 won per dollar, up 0.4 won from Wednesday.
"The decision by the U.S. Federal Open Market Committee (FOMC) may be interpreted as somewhat hawkish since the outlook for next year was raised according to its dot plot. However, there wasn't any notable fluctuation in the global financial market as it was within expectations. It won't have much impact on the local financial market, either," Bank of Korea (BOK) Governor Lee Ju-yeol told reporters.
In a widely expected move, the U.S. Fed raised the upper end of its base rate band to 1.75 percent from 1.5 percent. As the BOK has been maintaining its key rate at 1.5 percent since a 0.25 percentage point hike last November, the two countries are seeing a reversal of interest rates for the first time since August 2007. This is an unusual phenomenon since Korea, a relatively "unstable" market, should be offering higher interest rates than the U.S. There has therefore been concern foreign capital may desert Korea following the reversal.
The government, however, dismissed this scenario.
"Stocks take around 85 percent of foreign fund investments in Korea. They will be affected by the economic condition and outlook on corporate performances (instead of interest rates)," the finance ministry noted at a meeting to examine effects of the FOMC.
"The remaining 15 percent that invest in bonds are mostly long-term investment funds, including those from the central banks of major countries or sovereign wealth funds. A capital outflow following the interest rate reversal is unlikely."
Park Sang-hyun, chief economist at HI Investment and Securities, agreed.
"On top of the interest rate gap, preference over risky assets, external and internal economic conditions and expectation on foreign exchange rates work together to affect the direction of foreign capital," he said.
He also pointed out reversals in the past didn't lead to an exodus.
"Moreover, the market has already been expecting the reversal. When considering worries over emerging economies or aversion to risky assets, these have not notably increased recently. There is little possibility of foreign capital flowing out of the Seoul bourse," he said.
However, the country's huge household debt is a concern as rising interest rates will weigh on this. The central bank cannot continue freezing its rate since the U.S. Fed noted there will be further hikes. If the FOMC raises the key rate four times this year, the gap will expand to 1 percentage point. Analysts expect the BOK to raise its key rate at least twice this year.
"When considering the economy is likely to slow down in the latter half of the year, and central bank policy will have continuity following the reappointment of the governor, a rate hike is likely to come in May," said Kim Ji-na, an analyst at IBK Investment and Securities.
The market expects the fixed mortgage rate to near 6 percent around the end of this year, from below 5 percent.
The government said it will control household debt through the introduction of a new debt-to-income (DTI) ratio, and the lessening of the burden on vulnerable debtors. It also plans to expand policy financing for SMEs.
"The government will take appropriate market stabilization measures at the right time if there are market fluctuations," the finance ministry noted.