The US Federal Reserve’s latest quarter-point interest rate hike will not have a huge impact on the local financial market as the move was already expected, according to the Bank of Korea governor and the finance minister on Thursday.

On Wednesday, the Federal Reserve raised interest rates by 25 basis points for the third time this year and also predicted it would further raise its base rate in December.

The rate gap between Korea and the US now stands at 0.75 percentage point, as Seoul froze the rate throughout the year.

Bank of Korea Governor Lee Ju-yeol told reporters on Thursday morning after a monetary policy meeting, “The hike will not immediately affect the local financial market significantly as the Fed’s latest increase was already expected in the market.” 

He added that the central bank will be “more vigilant about the rate gap inside and outside of Korea as the US plans to raise the rate further.”

Finance Minister Kim Dong-yeon said, “Considering the past cases, the rapid outflow of foreign capital and market shock will be limited.

“We should still make it as a chance to reshuffle our industrial structure with the recognition of the strict international conditions such as the US rate rise, crisis spreading from emerging nations and prolonged trade disputes between the US and China,” Kim added.

The local financial and currency markets were also calm, showing no sharp fluctuations.

The KOSPI stock index closed up 0.7 percent and the won-dollar exchange rate closed down 0.25 percent.

Despite the limited impact on the market in the short term, the chances of a rate hike are growing as the Fed is expected to raise the key interest rate four times by the end of next year.

If the BOK freezes the key interest rate this year while the Fed raises its rate in December, the rate gap between the two nations will have widened to 1 percentage point.

“The growing rate gap between the two nations will press the BOK to raise the base rate,” said Shin Dong-soo, a researcher at Eugene Investment & Securities.

“Most monetary policy board members are stressing financial stability due to the growing rate gap between Korea and the US, growing household debts and the rise in housing prices,” Shin added.

There is also a dovish view in favor of freezing the rate, given prospects for sluggish employment and an economic slowdown in the second half of this year.

During the monetary policy board meeting in August, four members including Gov. Lee took hawkish positions in support of rate hikes, while two were neutral and one dovish. The two remaining monetary policy board meetings will take place on Oct. 18 and Nov. 30. 

By Shin Ji-hye(shinjh@heraldcorp.com)