(3rd LD) S. Korea to raise guard against market instability after Fed rate hike

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SEOUL, May 4 (Yonhap) -- South Korea's financial authorities said Thursday that they will remain vigilant against potential market instability after the U.S. Federal Reserve raised its policy rate again and opened the door for an additional rate hike.

Finance Minister Choo Kyung-ho, Bank of Korea (BOK) Gov. Rhee Chang-yong and other financial officials held a meeting to assess the impact of the Fed's rate increase.

"The government and the Bank of Korea will heighten the market monitoring system, and will closely check the financial soundness of our financial system and implement market stabilization measures swiftly if needed," the finance ministry and the BOK said in a statement.

The country's benchmark KOSPI fell 0.46 point, or 0.02 percent, to 2,500.94, and the local currency ended at 1,322.80 won against the U.S. dollar, up 15.4 won from Wednesday's close.

The Fed raised its benchmark rate by a widely expected quarter-point to a 5 percent-5.25 percent range Wednesday (local time), possibly the last in its policy firming.

The Fed started its aggressive campaign of rate hikes in March last year to tame inflation.

After the rate hike, Fed Chair Jerome Powell left the door open for an additional rate increase if inflation remains higher than expected, dismissing a rate cut within this year.

The market players have been hoping that the Fed may cut borrowing costs within this year amid signs of a global economic slowdown and continued stress in the banking sector.

The BOK held its key rate steady at 3.5 percent last month after a rate freeze in February as inflation appears to be easing and concerns are rising over an economic slowdown.

The central bank is scheduled to hold its monetary policy meeting later this month and may face a daunting task of whether to freeze the rate again or raise it.

The bank is expected to stand pat again amid easing inflation and a slowdown in economic growth.

South Korea's economy narrowly avoided a recession in the first quarter of the year after a contraction the previous quarter, by growing 0.3 percent. The first-quarter expansion follows a 0.4 percent on-quarter contraction the previous quarter.

The country's consumer prices grew at the slowest pace in more than a year in April on falling global oil prices, in the latest signal that inflation has receded.

Consumer prices, a key gauge of inflation, rose 3.7 percent last month from a year earlier, marking the first time in 14 months that the on-year inflation growth fell below 4 percent.

But the widened rate gap between the United States and South Korea may weaken the Korean won against the U.S. dollar and trigger a capital outflow, which in turn may force the BOK to hike the rate again.

sam@yna.co.kr
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