(LEAD) Fed's rate hike to have limited impact on S. Korean market: finance minister

All News 09:04 July 28, 2022

(ATTN: UPDATES with more details throughout; ADDS photo)

SEOUL, July 28 (Yonhap) -- South Korea's finance minister said Thursday the U.S. Federal Reserve's latest rate hike is expected to have a limited impact on the domestic financial market as the outcome is in line with market expectations.

Finance Minister Choo Kyung-ho made the remarks during his meeting with the central bank chief and heads of the country's financial regulators to discuss the fallout of the Fed's "giant step" rate increase on the market and economic situations.

At a two-day policy meeting that ended Wednesday (U.S. time), the Fed hiked the federal funds rate by 75 basis points for the second straight month to curb high inflation. The move raised its key rate to a target range of 2.25-2.5 percent.

The decision pushed the U.S. interest rates above South Korea's benchmark interest rates for the first time since February 2020. South Korea's base rate stands at 2.25 percent.

This photo, taken July 27, 2022, shows movements of South Korea's stocks and currency on monitors at a Hana Bank dealing room in Seoul. (Yonhap)

"The Fed's decision well matched market expectations. As global financial markets well digested the Fed's rate hike overnight, it is expected to have a limited impact on the South Korean market," Choo said.

U.S. stocks rallied Wednesday as investors raised bets on expectations that the Fed could slow the pace of its monetary tightening.

The Dow Jones Industrial Average rose 1.37 percent, and the tech-heavy Nasdaq Composite Index jumped 4.06 percent.

At a press conference, Fed Chair Jerome Powell said the U.S. economy is slowing but is not in a recession. He said another "unusually large increase could be appropriate" at its next meeting but added any decision will depend on economic data.

Choo, meanwhile, dismissed concerns that the widening gap of borrowing costs between the United States and South Korea could trigger foreign capital outflows.

"In the previous three cases where the U.S. interest rates exceeded Korea's, foreigners were net buyers of South Korean securities," he said. "South Korea's economic fundamentals and its proper responses to global economic issues more affect cross-border capital movements."

The reversal of interest rates between the two nations sparks concerns about capital outflows as investors tend to chase higher returns.

Capital flights are feared to further weaken the Korean currency against the U.S. dollar, putting upward pressure on inflation. The won has slid more than 9 percent per dollar so far this year.

The government said it plans to implement measures to stabilize the market, if volatility in the financial market heightens.

Choo said if bond yields sharply rise, the government could buy back Treasuries and the Bank of Korea will seek to purchase government bonds from the market in a bid to stabilize the debt market.

The government said it will also review the possibility of implementing market-stabilizing measures taken during the 2008-09 global financial crisis, if excessive herd behavior in the market amplifies volatility.