Shares benefit from the Fed’s clarity on rate

A signboard at the Korea Exchange in Yeouido, Seoul, on Thursday reflects a new high for the year for the Kospi as the Korean stock market has been on an upswing of late. [NEWSIS]

The Korean financial market welcomed news of slower and smaller increases in the U.S. benchmark interest rate as its stock index closed above the 2,030 mark Thursday.

It has become clear the U.S. Federal Reserve is likely to raise its key rate to 0.625 percent this year and the first round of increases is expected as early as June, Chair Janet Yellen announced at the March Federal Open Market Committee on Wednesday, U.S. time.

Initially, the Fed planned to raise the rate to as high as 1.125 percent.

The Fed also indicated next year’s rate target will be 1.875 percent, compared with a previous 2.5 percent goal.

In response, the Kospi opened about 5 points higher Thursday than the previous day. Foreign investors staged a buying spree for the fifth consecutive day.

“The Korean stock market can benefit because of its relatively stronger economic condition, including the country’s large trade surplus and foreign exchange reserves,” said Kim Yoon-seo, an analyst at KTB Investment & Securities. “Since implementation of the European Central Bank quantitative easing, European funds will be a major part of the capital inflow into the Korean market.”

Since early this year, thanks to eased concerns about the eurozone and early U.S. rate increases, more than 3 trillion won ($3.7 billion) worth of shares has been purchased by foreign investors as of early March.

Some Korean market analysts had predicted the first Fed rate hike would be in the fourth quarter this year.

“If the U.S. economy slows down in the second and third quarters, leading to poorer employment conditions or lower inflation rates, the rate hike could even be delayed until next year,” said Lim Dong-min, an analyst at Kyobo Securities. Despite some decline in the unemployment rate, it is difficult for the United States to increase wages due to low inflation, and the strong dollar might hinder growth if it continues.

Many experts believe the Fed again postponed its rate increase largely because of the strong dollar. Compared with 10 major currencies, the U.S. dollar’s value soared by about 20 percent during the past year. Meanwhile, the U.S. economy hasn’t recovered as much as the central bank hoped. Due to the strong dollar, the country’s import prices fell, leading to a lower forecast of inflation rate this year.

The Fed projects inflation to grow 0.6 percent to 0.8 percent. Its forecast for GDP is between 2.3 percent and 2.7 percent.

BY SONG SU-HYUN [song.suhyun@joongang.co.kr]