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Likelihood of capital outflow low in case of reversal in Korea-US rate gap

The likelihood of a capital outflow from South Korea is low even if the interest rate gap between Korea and the US is reversed, as the local currency is expected to remain strong, an analyst said Tuesday.

Kim Jae-chil, a researcher at the Korea Capital Market Institute, said volatility in the local foreign exchange market will likely be limited due to various conditions.

South Korea's sovereign bonds are also attractive for investors in Europe, where several central banks slashed interest rates to below zero, the market watcher said.

"From the point of view of European investors, Korean sovereign bonds are an attractive investment target," Kim told a seminar gathering.

The Fed raised its key rate by 25 basis points to between 1 percent and 1.25 percent last week, narrowing the rate gap with South Korea.

The Bank of Korea has kept its benchmark interest rate at a record low of 1.25 percent, but few analysts here expect the central bank to increase rates this year. 

Bank of Korea (Yonhap)
Bank of Korea (Yonhap)

The BOK has been in a dilemma because a rate hike could pose a significant threat to mounting household debt at a time when the economic recovery is still fragile.

Kim advised the central bank to consider "diversifying" its monetary policy, including a purchase of long-term sovereign bonds to support an economic recovery and stabilize the financial market. (Yonhap)
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