1. Bank of Korea sees only small risk of capital flight when Federal Reserves raises rates

Bank of Korea sees only small risk of capital flight when Federal Reserves raises rates

South Korea's central bank said on Tuesday that any US interest rate hikes had only limited prospects of triggering a massive flight of capital from South Korea, and it would not hike rates immediately after the US does.

By: | Seoul | Published: October 4, 2016 10:09 AM
Bank of Korea Governor Lee Ju-yeol later told lawmakers a Federal Reserve rate hike would not lead directly to higher interest rates at home. (Reuters) Bank of Korea Governor Lee Ju-yeol later told lawmakers a Federal Reserve rate hike would not lead directly to higher interest rates at home. (Reuters)

South Korea’s central bank said on Tuesday that any US interest rate hikes had only limited prospects of triggering a massive flight of capital from South Korea, and it would not hike rates immediately after the US does.

“When we consider the fundamentals of our economy, sovereign debt ratings and foreign exchange reserves, the chance that we will experience great outflows is not big,” the Bank of Korea (BOK) said in prepared responses to lawmakers’ requests ahead of a parliamentary audit.

“Even if there are outflows, we feel local banks have ample foreign exchange liquidity to withstand them.”

Bank of Korea Governor Lee Ju-yeol later told lawmakers a Federal Reserve rate hike would not lead directly to higher interest rates at home.

“We’ll have to make a decision on policy after we see what happens to markets and the economy after the Fed rate hike,” Lee said.

Between Sept. 1-23, foreigners bought 1.5 trillion won ($452.98 million)worth of South Korean shares and lowered their bond holdings by 0.4 trillion won between Sept. 1-22, the BOK said.

The BOK’s policy rate, currently at a record-low 1.25 percent, has been trimmed five times since August 2014.

Commenting on the effects of recent interest rate cuts, the central bank said the reductions have helped underpin growth momentum. However, it said the rate cuts have yet to adequately boost consumption and investment.

Lawmakers criticised the central bank on Tuesday for not taking adequate measures to curb household debt, which has skyrocketed since the BOK’s easing cycle began.

Lee said the bank’s accommodative policy was not aimed solely at propping up the property market.

“Our policy has to trickle down to consumers, but we haven’t seen much of that yet as the link between interest rates and consumerism has weakened. The property market was not our focus,” Lee explained.

The central bank said its policy would focus on easing temporary economic slowdown and managing anticipated pressure on the job market from an ongoing government push for structural reform in the corporate sector and the labour market.

($1 = 1,103.8000 won)

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