(3rd LD) S. Korea to take market-stabilizing steps if needed: official

(ATTN: UPDATES with bond market reaction in para 11; CHANGES photos)

SEOUL, Jan. 27 (Yonhap) -- South Korea plans to take measures to stabilize the country's financial market when needed, a senior government official said Thursday, after the Federal Reserve signaled at a rate hike in March to tame inflation.

The finance ministry assessed the Fed's monetary policy stance as hawkish, but it said the outcome of the U.S. central bank's latest rate-setting meeting is expected to have a limited impact on the South Korean market.

Fed chief Jerome Powell said Wednesday (U.S. time) that it has "quite a bit of room" to hike the federal funds rate to fight inflation after the Fed left the rate unchanged near zero at its two-day policy meeting.

The Fed is also expected to end its bond-buying pandemic-stimulus program in March and later launch the reduction of its asset holdings.

"The global financial market showed limited volatility overnight and South Korea's economic fundamentals remain sound," First Vice Finance Minister Lee Eog-weon said at a government meeting on the financial market.

He said the government will keep close tabs on market situations at home and abroad as there is high uncertainty about the pace of the U.S. monetary tightening and global inflation risks.

"If needed, the government will seek policy coordination with the Bank of Korea (BOK) to launch market-stabilizing measures in a timely manner, including the central bank's purchase of Treasury bonds," Lee said.

South Korea's benchmark stock index tumbled 3.5 percent Thursday as investors were panicked by the possibility that the Fed's policy tightening could be aggressive.

The KOSPI fell 94.75 points to end at 2,614.49 points, the lowest closing in 14 months. The Korean currency closed at 1,202.80 won to the greenback, down 5.10 won from the previous session.

Bond yields spiked in recent sessions due to the BOK's rate hikes and the government's proposal to create an additional extra budget of 14 trillion won (US$11.6 billion).

Yields of the three-year government bonds on Thursday rose 6.1 basis points to 2.217 percent, the highest in almost four years. Bond prices move inversely to yields.

Market interest rates could further rise as the BOK hinted at more rate increases in the coming months to fight inflation. On Jan. 14, the BOK raised the benchmark interest rate by a quarter percentage point to 1.25 percent, marking the third pandemic-era hike since August and November last year.

Financial authorities discussed policy measures to ease market jitters and minimize negative fallouts on the financial system.

"The financial market is likely to be volatile for the time being, but we need to closely monitor whether market uneasiness is too excessive, given that the economic fundamentals remain solid," Lee Se-hoon, secretary general of the Financial Services Commission, told a meeting on financial risks.

The South Korean economy grew 4 percent last year from a year earlier, the fastest growth in 11 years and rebounding from a 0.9 percent contraction in 2020, according to central bank data.

"The Korean economy has weathered the COVID-19 pandemic well, having regained the lost economic ground from the pandemic," the International Monetary Fund (IMF) said in a release after its annual consultation with South Korea.

Korea's economic growth is projected to remain "robust" in 2022 and 2023 at 3 percent and 2.9 percent, respectively, "supported by a recovery in private consumption and continued strong export growth," the IMF said.

sooyeon@yna.co.kr
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