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US rate hike likely to have limited impact on Korea: officials

Seoul troubled by rate hike pressure, slow growth dilemma

As the United States carried out its anticipated rate hike this week, South Korea faces mounting pressure to keep pace with the momentum amid prolonged slow growth and chronic household debt.

In a largely defensive gesture, key fiscal and monetary officials here said that the impact of the US rate hike would be limited, though they vowed anticipative measures for the potential consequences of the faster-than-expected rate hike timeline that has been signaled.

“The Fed’s latest rate hike should have a limited impact on South Korea,” Deputy Finance Minister Ko Hyung-kwon said Thursday in a meeting with senior officials from the Bank of Korea and the Financial Services Commission.

Citing Korea’s current account surplus for 74 consecutive months and sufficient foreign reserves, the deputy minister said that companies and households here could withstand the market situation for now, but added that the government would take action against negative impact.
Deputy Finance Minister Ko Hyung-kwon speaks Thursday in a financial policy meeting, following the US Fed's key rate hike. (Ministry of Strategy of Finance)
Deputy Finance Minister Ko Hyung-kwon speaks Thursday in a financial policy meeting, following the US Fed's key rate hike. (Ministry of Strategy of Finance)

Backing the ministry’s optimism, foreign investment in securities showed a mild increase in March-April, from $1.1 billion to $1.4 billion, despite the first interest rate reversal following the Fed’s rate hike in March, according to BOK data.

The US Federal Reserve raised its policy rate by 25 basis points to a range of 1.75-2 percent on Wednesday, local time. Though the hike itself had been predicted, the Fed also indicated that two additional hikes are likely to follow over the rest of the year, potentially inching up the yearly total number of hikes from three to four.

As Seoul’s policy rate has remained at the current 1.5 percent since November last year, the interest rate gap stemming from the US’ rate hike has been triggering concerns of capital outflow from Asia’s fourth-largest economy and other developing countries.

But one of the crucial factors deterring the country from tightening its monetary policies is its outstanding household debt, standing at a record 1,468 trillion won ($1.36 trillion) as of the first quarter of this year, up 8 percent from a year earlier.

Despite mounting speculations that the central bank might give in to the pressure, BOK Gov. Lee Ju-yeol reiterated a prudent approach regarding Seoul’s upcoming rate hikes.

“We will have to keep a close watch on how (the US Fed’s rate change) may affect the financial volatility in emerging economies,” Lee told reporters on his way to work.

While refraining from commenting on whether the US’ accelerating rate hike timeline may affect Seoul’s monetary policy schedule, Lee pointed out that the European Central Bank is also mulling the option of ending its easy-money stance.

Meanwhile, some state-affiliated think tanks such as the Korea Development Institute suggested in their recent reports that alleviated geopolitical tension on the Korean Peninsula would counter the impact of the policy rate fluctuation.

“Even if the Fed rate went up drastically by 50 basis points and led to capital outflow, the corresponding amount would be no more than about 6 percent of our foreign reserves, which is what our economy can handle,” said Choi Woo-jin, a macroeconomics researcher at the KDI.

By Bae Hyun-jung (