As the countdown begins for the U.S. interest rate hike, Korea is on edge to guard against its potential fallout on local financial markets.
The Bank of Korea is in an emergency response mode -- monitoring global markets round-the-clock since Monday -- getting ready to intervene if there is excessive volatility.
After a two-day policy meeting, the U.S. Federal Reserve is widely expected to increase its benchmark borrowing rate Wednesday, ending a seven-year era of near-zero interest rates that has defined its response to the financial crisis.
U.S. Federal Reserve board chair Janet Yellen. Global markets await the Fed's decision Wednesday on its benchmark interest rate, with a hike of 25 basis points widely expected. The uncertainty is what the Fed will say about how much and how fast it expects to raise rates again in coming months. (AP-Yonhap)
“Should (local) financial and forex markets become excessively volatile (in reaction to the Fed’s decision), we will seek out market stabilization measures in consultation with the government and financial authorities,” the central bank said Monday.
BOK Gov. Lee Ju-yeol noted last week that the first step would be to pump liquidity into the markets.
While viewing a Fed rate hike as a near certainty, experts here are divided over how the local markets will react and what the onset of a monetary tightening cycle in the U.S. will entail for Korea.
Analysts like Yoo Seung-min of Samsung Securities and Park Seok-hyun of Eugene Investment & Securities stress that a U.S. rate change is already priced into local markets and that Wednesday’s Fed meeting may eliminate one big source of uncertainty.
“Results of the Federal Open Market Committee meeting (the Fed’s branch that determines the course of monetary policy) may untangle some of the questions about the U.S.’ future monetary policy stance and global economic conditions,” Park said.
Others are calling for a more conservative approach, warning that the U.S. policy change could evoke a new and perilous mix of global economic uncertainties coupled with recent swings in oil prices and a slowdown in China.
They also warn that a rise of more than 25 basis points in the Fed rate and signals of a faster-than-expected tightening cycle to follow could throw global markets into a tailspin.
Higher interest rates in the U.S. are likely to prompt a reversal of capital flows from emerging markets to the U.S.
Since the financial crisis, global investors gobbled up emerging-market assets -- particularly fixed income assets -- in the face of rock-bottom interest rates in the U.S. They are estimated to have invested $163 billion in Korea since 2009.
On Seoul’s main bourse Tuesday, foreigners continued a selling binge for the tenth consecutive session, dumping a net 352.5 billion won ($298 million) worth of local stocks. The benchmark KOSPI, however, ended 0.27 percent higher, as investors picked up oversold stocks and volatile crude oil prices showed some stability.
By Lee Sun-young (email@example.com