(2nd LD) Fed's rate hike to have limited impact on S. Korean market: finance minister

(ATTN: UPDATES with more details throughout; CHANGES photo)
By Kim Soo-yeon

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 also dismissed concerns that U.S. interest rates standing higher than Korea's could trigger foreign capital outflows, citing South Korea's economic fundamentals.

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.

Fed Chair Jerome Powell told reporters 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 any decision will depend on economic data.

"The Fed's decision 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 at an emergency meeting on macroeconomic situations.

The meeting brought together the central bank chief and heads of the country's financial regulators to discuss the impact of the Fed's "giant step" rate increase on the market and economic conditions.

South Korean stocks traded higher Thursday, tracking overnight gains in U.S. markets, due to eased uncertainty about the Fed's rate decision. The benchmark stock index rose 18.86 points, or 0.78 percent, to trade at 2,434.39 as of 10:14 a.m.

The Korean currency was trading at 1,306.20 won against the U.S. dollar, up 7.1 won from the previous session.

The won has sharply fallen against the greenback in recent months as the Fed's aggressive monetary tightening boosted demand for the dollar.

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

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

South Korean policymakers shrugged off worries about capital flights, noting the country's external credit conditions remain sound.

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

The Bank of Korea said it will closely monitor capital flows and currency movements as there is still uncertainty about the pace and the depth of the Fed's monetary tightening.

The government said it is ready to implement measures to stabilize the market, when needed.

Choo said if bond yields sharply rise, the government could buy back Treasuries and the BOK 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.

Experts said South Korea's exports could be dented by the global economic slowdown as the Fed's aggressive monetary tightening has raised the risk of the U.S. economy falling into a recession.

Exports, which account for half of Asia's fourth-largest economy, shrank 3.1 percent on-quarter in the second quarter, compared with a 3.6 percent gain three months ago, central bank data showed.

The Fed's rate hike drive also could put pressure on the BOK to further raise borrowing costs.

In July, the BOK delivered an unprecedented 0.5 percentage-point rate hike in a bid to tame inflation. It marked the sixth rate increase since August last year.

A rate hike is meant to curb inflation but could increase debt-servicing burdens and slow down economic growth as it weighs on private consumption.

The International Monetary Fund lowered its 2022 economic growth outlook for South Korea to 2.3 percent from 2.5 percent. South Korea's finance ministry put its 2022 economic growth forecast at 2.6 percent.

sooyeon@yna.co.kr
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