Korea vows vigilance as U.S. rates rise above local interest rates

Finance Minister Choo Kyung-ho speaks at a meeting held to discuss the economy in central Seoul on Thursday. [YONHAP]

Korea will take preemptive measures to prevent market volatility in the wake of the U.S. Federal Reserve's 75-basis-point rate increase Wednesday, Finance Minister Choo Kyung-ho said.

The Fed raised the federal funds rate by 75 basis points for the second consecutive time on Wednesday, putting it in a range of 2.25 to 2.5 percent. Korea's base rate is 2.25 percent.

The Fed's decision "was in accordance with the market expectations," and its "impact on the domestic finance markets is projected to be limited," Choo said in a meeting with Bank of Korea Gov. Rhee Chang-yong in central Seoul on Thursday. The meeting was also attended by Financial Services Commission Chairman Kim Joo-hyun and Financial Supervisory Service Gov. Lee Bok-hyun.

Choo said there are concerns about capital outflow from Korea due to the higher rates in the United States, but added that foreign capital flowed into Korea in the past three cases when the rates were reversed.

The last time the U.S. rates were higher than Korea's was in February 2020.

"The fundamentals of our economy, global events and appropriate responses are believed to play more crucial roles in capital inflows and outflows."

Choo added that Korea will take preemptive measures to prevent volatility in the bond market, including the government's Treasury buyback operations and the Bank of Korea's timely purchase of state bonds.

He vowed to open Korea's foreign exchange market to the "global level" in the third quarter and to take measures for Korea to be accepted into the World Government Bond Index (WGBI).

The WGBI measures the performance of fixed-rate, local currency, investment-grade sovereign bonds from over 20 countries. The inclusion in the index is expected to raise inflows of foreign capital.

"The government, the Bank of Korea and related organizations will remain highly alert, and be fully ready for all possibilities," Choo said.

The committee "anticipates that ongoing increases in the target range will be appropriate," read the statement from the Federal Open Market Committee (FOMC).

The committee is "strongly committed to returning inflation to its 2 percent objective."

Fed Chair Jerome Powell said that he does not think "the U.S. is currently in a recession," citing the strong labor market.

Inflation in the United States hit 9.1 percent in June, which was higher than the estimate and the highest rate since 1981. Inflation in Korea was 6.0 percent in June, the highest since November 1998.

The next Korea Monetary Policy Board meeting is scheduled on August 25 and the Fed's next two-day FOMC meeting starts on September 20.

BY JIN MIN-JI [jin.minji@joongang.co.kr]