Hike in interest rates by Fed fails to rattle markets

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Hike in interest rates by Fed fails to rattle markets

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The value of the won fell on Thursday as foreign investors offloaded their shares on the Korean market after the U.S. Fed raised its interest rate. [NEWSIS]

After the U.S. central bank raised interest rates for the first time in more than nine years, there was no panic in Seoul’s financial markets.

In fact, the Federal Reserve’s Wednesday decision to set a new target range for the federal funds rate of 0.25 percent to 0.5 percent helped Seoul’s primary market enjoy a rally for the third consecutive trading day. The Kospi closed 0.43 percent higher, or 8.56 points, at 1,977.96 on Thursday.

Seoul wasn’t the only market that showed positive signs after one of the major points of volatility haunting global stock markets was removed. Japan’s Nikkei 225 rallied nearly 1.6 percent, while the Shanghai composite index climbed 1.7 percent. The U.S. market overnight rose 1.28 percent.

Experts said the global calm was the result of the Fed signaling its decision clearly over recent weeks. In fact, emerging markets have been fluctuating since the beginning of the year and even up to November.

Recent declines in crude oil prices were considered a possible factor that could prevent the U.S. central bank from pushing up interest rates.

But the U.S. Federal Reserve’s Federal Open Market Committee (FOMC) announced on Wednesday it would raise its base rate from zero to 0.25 percent, to 0.25 percent to 0.5 percent.

Korea’s minister of strategy and finance, Choi Kyung-hwan, said the rate hike would have limited impact on the Korean economy.

“As the FOMC decision has met market expectations, concerns have been eased, and it will have limited impact on our economy,” Choi said at a ministerial meeting on long-term economic strategy held in central Seoul.

But citing remaining volatilities in the global economy, he emphasized the need to be aware of further Fed increases. Choi said the government will keep monitoring market movements in order to take preemptive action when needed.

An interest rate hike by the United States can theoretically cause foreign capital to move out of the country. If capital outflows are rapid, it can influence the overall economy.

Joo Hyung-hwan, vice finance minister, dismissed concerns about capital outflows, citing the country’s strong economic fundamentals.

“Korea is not an exporter of crude oil or other commodities, so it will be less affected by the U.S. rate increase,” Joo said. “We are seeing current account surpluses every month and have sufficient foreign exchange reserves.”

Sell-offs by foreign investors are around 1 trillion won ($850 million) on average each month, which is low compared to 10 years ago, when the monthly outflow was around 2.5 trillion won, he said.

“As a preemptive measure, the government will make aggressive efforts to promote the country’s robust economic fundamentals to overseas investors and international credit rating agencies through conference calls and other means,” Joo said.

“Since we were fully warned, there won’t be a rapid capital outflow or fluctuations in stock prices or exchange rates,” said a senior official at the Financial Supervisory Service.

“As uncertainties have faded away,” he continued, “the market seems relieved.”

Foreign investors sold 65.5 billion won worth of shares on the Kospi on Thursday, while they bought 71.4 billion won worth Kosdaq shares, according to data by Korea Exchange. The Korean won’s value fell slightly to 1,180.1 won.

“Korea’s external position remains healthy, with its current account balance safely in surplus and the short-term FX-debt-to-reserves ratio hovering at historically low levels,” said Lim Ji-won, chief economist for Korea at J.P. Morgan based in Seoul. “That said, capital outflows are expected to stay limited. We’re more focused on the capital outflows via locals’ overseas investment.”

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

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