South Korea’s financial market could withstand a possible U.S. interest rate hike, the central bank said Tuesday, brushing off concerns that the move could trigger a massive outflow of foreign capital.
Market watchers expect the U.S. Federal Reserve’s first rate hike in almost a decade to come as early as June as the U.S. economy shows signs of recovery. A recent Bloomberg poll showed that 12 percent of the respondents projected a rate hike in June, while a whopping 71 percent predicted the Fed to wait until September.
Some economists have raised caution that the move may spark a sudden outflow of funds from emerging markets, subsequently affecting Asia’s fourth-largest economy as well.
“The impact of a U.S. rate increase on South Korea is forecast to be at an endurable level,” the Bank of Korea (BOK) said in a report submitted to the parliament, citing the country’s strong economic fundamentals backed by a continued streak of a current account surplus as well as improved external payment capability.
South Korea posted a current account surplus for the 36th month in a row in February. Its foreign exchange reserves reached $362.8 billion as of the end of last month, ranking as the world’s seventh-largest holder of foreign reserves as of end-February. The comparative data for March is not yet available.
The BOK’s forecast is in line with recent remarks by key economic policymakers that have played down the need for a rate hike in tandem with the Fed’s move.
Speaking to reporters in Washington on Friday, Finance Minister Choi Kyung-hwan said “there is a need to think about whether a rate rise in the U.S. mandates a rate rise in Korea.”
In an April 9 press conference following the BOK’s decision to hold the base rate at a record-low of 1.75 percent, BOK Gov. Lee Ju-yeol also stressed his view that there is no need to immediately track the Fed’s rate normalization, adding that the central bank will factor in both macroeconomic conditions as well as the Fed’s move in deciding its policy stance.
The BOK, however, noted that the impact of the Fed’s rate rise to be “significant” if the move comes earlier than expected or overlaps with other global risks such as uncertainties in Greece.
Regarding household debt, the central bank projected that it is unlikely for the issue to develop into a systemic risk in the near future, citing the local financial system’s resilience.
The BOK said the chances of deflation are “limited” as both core inflation, which excludes volatile oil and food prices, and expected inflation are hovering at the low- to mid-2 percent level.
Earlier this month, the central bank slashed its inflation outlook for this year to 0.9 percent from 1.9 percent on weak oil prices. For 2016, it projected consumer prices to rise 2.2 percent, down from an earlier forecast of 2.6 percent. (Yonhap)
