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Korea boosts market vigilance

Korea boosts market vigilance

FOMC’s stimulus cuts expected to have little impact on Korea

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Published : 2013-12-19 20:25
Updated : 2014-02-09 12:15

Korea’s financial policymakers and regulators have tightened their vigilance over the financial market following the U.S. Federal Open Market Committee’s decision to cut back its monthly bond purchases.

Although the U.S. tapering of its quantitative easing would have minimum impact on Korea given its sound fundamentals and macroeconomic policies, financial authorities have called for increased monitoring and contingency measures against capital-flow volatility.

“There is a potential for the financial and foreign exchange markets to face increased capital-flow volatility in the short term,” Deputy Prime Minister and Finance Minister Hyun Oh-seok said in an economic-related meeting on Thursday.

“Given Korea’s sound economic conditions, the effects (of the U.S. tapering) will be limited.”

The deputy prime minister added that the beginning of the U.S. monetary stimulus cuts signified alleviated uncertainties as the world’s largest economy recovers.

The Korean benchmark KOSPI rose 0.05 percent to 1,975.65 on Thursday, following an overnight gain on Wall Street where the Dow Jones Industrial Average rose 1.84 percent to 16,167.97 on Wednesday. The won-dollar exchange rose 8.8 won to 1060.1 won.

Park Won-shik, senior deputy governor of the Bank of Korea, also presided over an emergency meeting to evaluate potential effects of the tapering on Korea and other markets.

“Financial markets in the U.S. and Europe responded calmly overnight,” the senior deputy governor said.

“This means that uncertainty over the tapering has waned as (the FOMC’s monetary cuts) did not exceed market expectations.”

However, the Korean central bank said it would not hesitate to devise and implement a set of measures to safeguard the Korean financial market against any disruptions from the tapering.

The FOMC decided to scale back its monthly liquidity injections amid improvements in the labor market.

The U.S. jobless rate for November was recorded at 7 percent, lower than the initially expected 7.2 percent.

It also revised its growth outlook for this year from 2-2.3 percent up to 2.2-2.3 percent, while expanding the range of its 2014 growth forecast from 2.9-3.1 percent to 2.8-3.2 percent.

Next year’s unemployment rate has been projected at around 6.3-6.6 percent, down from its initial expectations of 6.4-6.8 percent. The jobless rate is now expected to reach 7-7.1 percent this year, down from 7.1-7.3 percent.

“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the committee decided to modestly reduce the pace of its asset purchases,” the FOMC said in a statement.

“Beginning in January, the committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.”

The U.S. FOMC added that it would maintain its federal funds rate of 0 to 0.25 percent as long as the unemployment rate remained above 6 percent and inflation below its 2 percent target.

By Park Hyong-ki (hkp@heraldcorp.com)

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