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(LEAD) U.S. rate hike to have limited impact on S. Korea: finance minister

All Headlines 10:01 September 27, 2018

(ATTN: CHANGES headline, ADDS paras 4-6, photo)

SEOUL, Sept. 27 (Yonhap) -- The latest rate hike by the U.S. Federal Reserve will have a limited impact on South Korea, with authorities here ready to take actions if the need arises, the country's chief economic policymaker said Thursday.

As widely expected, the U.S. Federal Reserve raised interest rates by a quarter of a percentage point to a range of 2 percent to 2.25 percent Wednesday and signaled one more rate hike within this year.

The U.S. central bank said it foresees three more rate hikes in 2019.

"Given our sound economic conditions, the rate hike's impact will be limited," Finance Minister Kim Dong-yeon said in a meeting of economy-related ministers. The policymaker said there can be more rounds of rate hikes in the U.S., which have ripple impacts on emerging markets, while the trade war between the U.S. and China can be drawn out.

"We have to prepare for a set of measures (against such developments)," he emphasized.

The minister also ruled out the possibility of a drastic capital outflow in the wake of a widening rate reversal between South Korea and the U.S.

The Bank of Korea has kept its key interest rate at 1.5 percent, and the rate gap between Korea and the United States has now widened to 0.75 percentage point. This development could prompt foreign investors to move capital out of South Korea since they can seek higher-yield assets abroad.

The current interest rate reversal is estimated to have had little impact on the South Korean financial market, but some analysts have voiced concerns that a capital outflow is likely if the rate gap widens further.

South Korea suffered a net capital outflow of 8.2 trillion won (US$7.65 billion) from the local stock and bond markets between May and July 2006, when the U.S.-South Korean rate gap stood at 1 percentage point.

That translated into a monthly average of 2.7 trillion won, nearly thrice the amount of capital outflow when the rate difference was 0.5 percentage point or below.

Finance Minister Kim Dong-yeon speaks during an economy-related ministers meeting in Seoul on Sept. 27, 2018. (Yonhap)

sam@yna.co.kr
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