U.S. rate decision to have a limited effect on market

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U.S. rate decision to have a limited effect on market

When the U.S. central bank finally announced its decision to hold on to the near-zero interest rate, which for months kept investors on edge, it appeared as though a weight had been lifted and stocks in emerging markets rose in response.

There is already speculation in the Korean financial market that the country’s own central bank now has the leisure to seek another rate cut as early as next month.

Korea’s benchmark Kospi gained nearly 1 percent, or 19.46 points, on Friday to close just shy of 2,000, while the secondary market Kosdaq rose nearly 3 percent - less than 10 points short of reaching 700.

Other emerging markets including China and Taiwan all rose at a similar rate. The emerging markets’ response contrasted to that of advanced economies including the United States as the Dow Jones Industrial lost 0.39 percent, while the Japanese stock market tumbled nearly 2 percent.

Earlier, many market participants including those in Korea expected that the U.S. Federal Reserve would raise the key interest rate for the first time in nine years, which would have caused a major outflow of foreign investors in emerging markets, even in Seoul.

Yet it was clear that Janet Yellen, the chair of the Board of Governors of the Federal Reserve System, and her colleagues took a dovish stance.

The Fed’s decision may have been a breather, though market experts doubt its positive impact will last long, particularly since it is still unclear as to when the U.S. central bank will raise interest rates, an uncertainty that has put a burden on the emerging market, making it more likely investors will put focus on advanced markets.

“We were expecting that the U.S. Fed would throw in the dice on their monetary decision this month, and despite recent external uncertainty, we expected the Fed to raise the interest rate,” said Yoon Yeo-sam, an analyst at KDB Daewoo Securities.

“The postponement of the interest rate hike will have a positive short-term influence on the global financial market, but the policy burden on the U.S. Fed is still valid.”

In a meeting with the heads of commercial banks on Friday, Bank of Korea (BOK) Governor Lee Ju-yeol shared a similar view, saying that uncertainties still remain in the market, with the global market continuing to watch when the Fed will hike the interest rate.

However, the governor projected that the U.S. Fed will raise the key interest rate within the year.

“Among the 17 members on the Federal Open Market Committee, 13 expressed their view that it would be appropriate to raise the interest rate within this year, so we can’t erase the possibility of a rate hike in either October or in December,” the governor said.

Experts are already speculating over Korea’s monetary policy moves. Some previously projected that the BOK would cut the interest rate as the Korean economy continues to slow.

“We could expect an additional interest cut within this year as the policy burden from the U.S. Fed eases somewhat,” Yoon said.

The BOK governor on Friday also hinted at the possibility when he told lawmakers during the national audit that the current interest rate level has not yet reached its lowest point.

With the Korean economy showing slow growth, doubts have arisen as to whether it would be able to reach its 2.8 percent target.

Morgan Stanley earlier this week lowered its outlook for Korea from 2.5 percent to 2.3 percent as the country’s largest export market, China, continues to struggle.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]
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