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By Choi Kyong-ae
The U.S. Federal Reserve's rate hike will have no major negative impact on Korea's financial market and overall economy, officials and analysts said Thursday.
They said it will not pose any major upward pressure on the Bank of Korea's (BOK) monetary policy at least in the first half of next year due to the sluggish economy here.
BOK Governor Lee Ju-yeol also said the rate hike would not affect the domestic financial market adversely.
"As the hike was pretty much expected and future hikes will be gradual, we don't have to worry about any negative impact on the market," Lee told reporters.
He said the bank will closely monitor the domestic situation, as the hike will increase uncertainties in emerging markets.
Government officials said any impact from the U.S. rate hike on the overall economy will be "limited."
Korea's domestic demand and investment remain too weak for the BOK to act, although the Fed has begun to lift its near-zero benchmark rate, economists said.
On Dec. 16, the Fed said it would raise the benchmark federal-funds rate by 25 basis points to a range of 0.25 percent to 0.5 percent from a 0-0.25 percent range. It said it will continue lifting it gradually over the following three years depending on economic performance.
Whether the spread between U.S. and Korean rates can narrow depends on how the Korean economy reacts to market volatilities following the first hike in the U.S. overnight interbank lending rate in nearly a decade, economists said.
"Given the current lackluster domestic spending, chances are low that the BOK will raise its key rate at least during the next 6 months to be in line with the U.S. plan," Hyundai Research Institute economist Hong Jun-pyo said.
As Korea appears to be entering a low-growth phase, its gross domestic product growth is unlikely to exceed 3 percent next year. There won't be a massive capital flight from Korea which has sizable foreign-exchange reserves reaching $368.46 billion as of the end of November, and offers relatively high interest rates to global investors compared to countries that have a similar credit rating to Korea, he said.
"For the reasons, rate increases are not a likely option to defend the economy."
The BOK and the finance ministry expected Asia's fourth-largest economy to grow by 2.7 percent this year, down from last year's 3.3 percent, due to growing uncertainties such as the U.S. tightening plan and China's slowdown.
Their growth forecasts for next year are 3.2 percent and 3.1 percent, respectively. All the figures were revised down from their earlier projections.
As long as the economy does not deteriorate next year compared to this year, the BOK has no strong reasons to lower the base rate to support growth, economists said.
"While maintaining the current rate levels, the government is required to closely monitor the financial markets, domestic and international, and liquidity conditions in the markets to cope with any volatility," Kim Yoon-kyung, an economist at Korea Center for International Finance, said.
Hana Financial Investment economist Soh Jae-yong warned there may be a strong push from the finance ministry asking the central bank to cut the base rate further early next year to meet the annual growth targets.
The BOK has kept the key rate at an all-time low of 1.5 percent after four rate cuts since August last year, which turned out to have only stimulated the real estate market.
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