Korea on alert over aftermath of US rate hike

With the Federal Reserve raising its target range for the federal funds rate by 25 basis points to between 1.75 percent and 2 percent, economists here have asked policymakers to respond given the continued rise of household debt.

The outcome of the Fed board meeting skewed slightly hawkish, and modest changes to the “dot plot” could be chalked up to data dependence. The board is expected to continue implementing gradual rate rises.

In a meeting with senior officials from the Bank of Korea (BOK), the Ministry of Strategy and Finance and the Financial Services Commission (FSC), Thursday, Deputy Finance Minister Ko Hyung-kwon said the ministry will apply pre-emptive measures to offset the impact of U.S. rate hikes on the economy and low-income families.

“Given the ample trade surplus, it’s highly unlikely the Fed’s decision will spur any large capital outflows because Korean equity assets are still attractive to foreign investors; however, the decision is likely to have some impact on currencies in emerging economies. We have to keep an eye on their moves as high volatility in currencies may burden the Korean economy,” Ko said.

The Financial Supervisory Service (FSS) said it had asked top local lenders not to raise their lending rates in tandem with the U.S. decision citing the continued rise in household debt.

“It’s unacceptable for local lenders to raise their rates to borrowers or debt holders because of the Fed’s decision. The U.S. rate decision increased market volatility; however, we will team up with relevant government agencies to limit the growth of household debt,” the FSS said in a statement.

The BOK said total household debt was 1,468 trillion won ($1.4 billion) as of the first quarter of this year with numbers continuing to rise. The debt was about 81 percent of the country’s total GDP.

The central bank said rising household debt will weigh on the economy for “longer than expected.” A continued quantitative easing helped global financial markets see an increase in liquidity, however, the bank said the market is seeing imbalances.

Chung Young-sik, chief of the International Finance Bureau at the Korea Institute for International Economic Policy, expects the U.S. rate decision may cause local lenders to raise their rates. “This is not an ideal scenario in terms of the soundness of households especially for low-income families,” Chung said.

The BOK left its key policy rate unchanged at 1.5 percent. The bank’s assessment of growth and inflation stays unchanged from May. Looking forward, economists and BOK officials say only one more 25 basis points hike will be made in the third quarter, probably in July at the earliest.