Authorities vow closer watch on US rate hike repercussion

South Korea’s central bank has vowed closer monitoring in domestic financial markets to brace for potential volatile capital flows following a US rate hike Wednesday, while the financial watchdog reviewed a contingency plan of the national financial system.

The Bank of Korea said Thursday it held an emergency meeting led by BOK Deputy Gov. Huh Jin-ho to keep close tabs on the possible consequences of the US Federal Reserve’s decision and its persisting hawkish stance in monetary policymaking.

But the central bank at the same time played down the concerns about immediate capital flight.

The US monetary tightening decision was “not beyond expectation” and the widened interest rate differential “is not a necessarily problematic” factor to foreign capital outflow, BOK Gov. Lee Ju-yeol told reporters Thursday morning.

A slower pace of US rate hikes, however, would allow the world’s central banks including the Bank of Korea more leeway in monetary policymaking, added Lee, who is also on the board of the Bank of International Settlements.

Possibilities of immediate capital outflow from Korean financial markets are low, said a high-ranking BOK official.

“(The BOK) expects a minor degree of foreign capital outflow, as capital investing in Korean bonds, especially in public sectors, has been on a constant rise,” Hong Won-sok, head of BOK’s International Planning & Coordination Team, told reporters in a press conference Thursday, without elaborating on figures. “Stock markets are likely to be exposed to global risk factors, but (bond markets) will experience a limited degree of market volatility.”

In the meantime, the Financial Supervisory Service, a financial watchdog, held a meeting Thursday presided over by First Senior Deputy Gov. Yoo Kwang-yeol to urge its staff to strengthen risk management of financial institutions revolving around national household debt, foreign capital flow and financial institutions’ foreign currency liquidity.

Also at 3 p.m., a FSS deputy governor responsible for bank supervision, Oh Seung-won, convened a vice presidential-level meeting with five commercial banks and units of three foreign banking groups to monitor foreign currency liquidity and review conditions for currency carry trades.

This came as the US Federal Reserve raised the base rate by 0.25 percentage point, in what was the fourth interest rate increase of the year, to a target range of 2.25-2.5 percent.

The unanimous decision widened the interest rate differentials between Korea and the United States to the maximum 0.75 percentage point yet again, about a month after the Bank of Korea increased its policy rate to 1.75 percent.

But this also involved Fed Chairman Jerome Powell’s comments about the “softening” pace of US economic growth, as well as lowered projections for US rate hikes in 2019 from three to two.

The US stock market suffered volatile trading sessions that sent its major indexes -- the S&P 500, Dow Jones Industrial Average and Nasdaq Composite Index -- to fresh lows for 2018.

The Korean stock market, along with other Asian markets, took the heat from the Wall Street slump, experiencing a roller-coaster ride.

The top-tier Kospi retreated 0.9 percent, while the second-tier Kosdaq ended 0.6 percent lower, following ups and downs throughtout the trading. Foreign investors then net sold stocks on Kospi worth 40.8 billion won ($36.2 million). Market bellwether Samsung Electronics, accounting for one-fifth of the entire Kospi market cap, gave up 1.2 percent. 

The local currency weakened against the greenback Thursday. The dollar-to-won currency exchange rate came to 1,127.8 won, up 4.3 won compared to the previous session’s close.

By Son Ji-hyoung 
(consnow@heraldcor.com)