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| Bank of Korea Governor Lee Ju-yeol, surrounded by reporters, says on his way to his office in Seoul, Thursday morning that the central bank will need to stay on guard over possible capital outflows amid the widening rate gap between the U.S. and Korea. Yonhap |
Fed's move puts BOK under pressure to hike rates
By Park Hyong-ki
Concern over capital flight is growing as the interest rate gap between Korea and the United States has increased to 0.75 percentage points, the widest in 11 years and two months.
This comes as the U.S. Federal Reserve raised its rate by 25 basis points to a range of 2 percent to 2.25 percent after a two-day meeting.
It is expected to further widen even if the Bank of Korea (BOK) raises its rate in November, as the Fed forecasts one more hike in December and three more in 2019, signaling the end of its "accommodative" policy.
Fed Chairman Jerome Powell said the U.S. economy is growing "strong with low unemployment and rising wages," backing the central bank's projection of four additional hikes.
The widening rate gap is further setting off alarm bells over the possibility of foreign capital exiting the market here, according to analysts.
BOK Governor Lee Ju-yeol told reporters on his way to his office that the U.S. rate hike was expected, and the central bank would increase its "vigilance and be on guard" against capital outflows.
"It is true that economic circumstances have made it more difficult for the central bank to decide the course of its monetary policy," Lee said.
The rising joblessness and growing inequality at home and the U.S.-China trade conflict are some of the internal and external factors that are making it tricky for the BOK, he noted.
Analysts say the gap could pose a risk of capital outflows amid a negative outlook and emerging market contagion from the crisis in Turkey.
"Concerns could grow should the market see signs of foreign funds that were expected to stay here over the medium to long term leave the market," said Sung Tae-yoon, an economist at Yonsei University.
"They could exit following short-term capital not only because of the growing rate gap but also because of the pessimistic outlook for corporate earnings and economic growth."
These are the two key outlook indices that help judge whether long-term foreign capital should stay or leave the market, Sung noted, adding they do "not look good" at the moment.
The OECD lowered its projection for Korea's growth recently to 2.7 percent from 3 percent mainly due to growing uncertainties over the U.S.-China trade dispute.
Kim Doo-un, an economist at KB Securities, agreed, saying long-term capital exiting the market at the first sign of economic trouble would pose a serious risk to the economy.
He added the U.S. may consider slowing down its pace of rate hikes next year as Powell said the trade war remains the biggest challenge and could hurt employment in the long run.
"The trade dispute could have the Fed readjust its rate pace. This would enable the BOK to buy more time to narrow the rate gap," Kim said.
KB Securities expects the BOK to revise down its 2018 growth projection in October, and raise its key base rate in November as inflation grows toward its 2 percent target.
Between May and October in 2000, the rate gap between the U.S. and Korea widened to a record 1.5 percentage points, according to the BOK. The Fed's increase to the 2 percent to 2.25 percent range was the eighth time it has raised its rate since late 2015.
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