U.S. interest rate increase rocks Seoul stocks

Korean stock markets fell sharply on Thursday as foreign and institutional investors led the outflow following the U.S. Federal Reserve Bank’s decision to raise its benchmark interest rate, a widely expected move.

The main bourse Kospi dropped 1.84 percent to 2,423.48, while the junior Kosdaq ended lower at 864.56, down 1.2 percent. The fall came after the Fed hiked its key rate a quarter of a percentage point to a range of 1.75 percent to 2 percent.

The degree of the stock decline had a big impact in Korea. The main indexes in other major Asian countries including Japan and Hong Kong fell by less than 1 percent.

The U.S. decision widened the gap with Korea’s interest rate at 1.5 percent, a factor that analysts say could trigger capital flight from the country. Foreign and institutional investors went on selloffs, with foreigners selling 470.3 billion won ($434.5 million) and institutions 53.7 billion won.

Some analysts said that hawkish comments from the Fed contributed to undermining investors’ sentiment, raising the possibility of the U.S. rate moving up at a faster than expected pace.

“The decline was affected by hawkish interest rate forecasts that pointed to a total of four rate rises this year,” said Kim Young-hwan, an analyst at KB Securities.

“The Fed also dropped its statement that the central bank will keep rates lower in the post-crisis era,” he said.

The analyst also cited the correction on stocks that received a boost from the summit between the United States and North Korea as a force dragging down the market, along with a lingering trade row among the world’s two largest economies, the United States and China.

The financial authorities on Thursday scrambled to calm the markets and warned commercial banks against a drastic increase in lending rates.

The Finance Ministry and the Bank of Korea said that the widely expected hike would have a limited impact on Korea’s economy.

“The result from the Federal Open Market Committee (FOMC) meeting is not something that the market couldn’t expect,” said Governor Lee Ju-yeol of the Bank of Korea.

“So, we cautiously expect it to have a limited effect on the domestic market…And a single or several rate rises in the U.S. couldn’t directly lead to a capital exodus.”

The Financial Supervisory Service ordered banks not to push up lending rates excessively in following through with the Fed move, saying that it would address the issue “sternly.”

The focus is on how the Bank of Korea will decide its interest rate in July, following the Fed move and the anticipated unwinding of quantitative easing at the European Central bank.

“With the faster-than-expected hikes in the U.S., expectations for a rate rise are building,” said Kim Ji-na, a fixed-income analyst at IBK Securities.

“The minutes of the May monetary policy meeting also hinted at a hawkish stance by Governor Lee Ju-yeol, which raised the possibility of minority votes for a rate hike,” she said.

Still, the chief of the central bank has yet to send a decisive signal for another rise after the Bank of Korea lifted its key rate from a record low of 1.25 percent to 1.5 percent last November.

Lee vowed to maintain a loose monetary policy aimed at stimulating the economy through the second half of this year earlier this week, saying that the bank will cautiously judge the need for further adjustment or monetary tightening.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]