BOK saddled with U.S., China risks

South Korean monetary policymakers are struggling to cope with the prospects of an interest rate hike in the U.S. and further currency devaluation in China.

Should the U.S. Federal Reserve raise its key rate, the Bank of Korea would have no choice but to follow suit in a bid to minimize capital outflow, as economists and analysts predict.

If the People’s Bank of China chooses to devalue the yuan, following its artificial depreciation of it for three consecutive days in August, the BOK will face aggravated competition among major exporters to allow the Korean currency to weaken ― which a higher interest rate would work against.
 

 
A key issue is whether the Federal Open Market Committee of the U.S. will choose a rate hike in the next meeting, slated for Sept. 16-17.

“A certain level of shocks to the domestic market would be inevitable for a while as soon as the U.S. raises its benchmark rate, though the market has already reflected the U.S. move to take a tighter monetary policy,” said research analyst Yoon Bo-won of Hana Daetoo Securities.

Under the scenario, the BOK will be pressured to raise its key rate from the record low of 1.5 percent to stabilize the foreign exchange, bond and stock markets.

But when it comes to China, whose economy is estimated to have been in a serious slowdown, Korea should brace for the so-called currency war, set to involve the Chinese yuan, Japanese yen and euro.

The yen and euro have gained rapidly in the global exchange market over the past three weeks after China embarked on its policy to devalue the yuan on Aug. 11. The Asian superpower also cut interest rates in late August.

More and more global market participants have explored the possibility that Japan will extend its quantitative-easing amid the China factor.

Japan’s cheap yen policy over the past few years has revitalized the exports of Toyota Motor and Sony Corp. and the Japanese government appears to be worried about its main exporters losing price competitiveness due to the yen’s recent gain.

The eurozone, which also began quantitative-easing in March this year, could select to expand its banknote-printing in the wake of China’s aggressive monetary easing.

As for Korea, its private consumption has remained weak two rate cuts so far this year. In addition, the outlook in the export sector, which underwent a severe slump in the first half, is not rosy ― despite the weakening won ― amid the widening uncertainty in China, Korea’s largest export destination.

Amid a U.S. senior official’s comments hinting at the feasibility of a hike as early as this September, the dollar rose by 8.9 won versus the Korean currency from a trading session before to close at 1,182.5 won on Monday.

The Japanese yen also posted a stronger position against the won to finish at 976.14 won per 100 yen, up 0.14 percent from a session earlier.

Most local analysts predict that even if the U.S. delays its rate hike to beyond September, the uncertainty will remain as a factor stifling improvement in local financial indices.

The BOK Monetary Policy Committee’s monthly rate-setting meeting is scheduled for Sept. 10 -- a week ahead of the FOMC gathering.

By Kim Yon-se (kys@heraldcorp.com)