Korea on alert over af­ter­math of US rate hike

The Korea Times - - BUSINESS - By Kim Yoo-chul yckim@ko­re­atimes.co.kr

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.

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