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| Bank of Korea Governor Rhee Chang-yong answers questions from reporters during a press conference in Seoul after freezing the key rate, Feb. 23. Joint Press Corps-Yonhap |
Rate freeze decision heightens volatility
By Lee Min-hyung
Fears of a widening interest rate gap between the Bank of Korea (BOK) and the U.S. Federal Reserve are rattling financial markets here after what appears to be a "prematurely dovish" decision by the BOK.
The Korean central bank froze its key rate at 3.5 percent on Feb. 23 amid escalating recession fears and a real estate meltdown. But the local financial market reacted sensitively to the BOK's preemptive step over the past week.
A sharp depreciation of the Korean won has particularly surprised market participants. The won-dollar exchange rate closed at 1,297.1 won when the latest rate-setting decision was announced, down 7.8 won from the previous day. But it soared during the next two trading days when the figure rose to 1,323 won per dollar on Tuesday.
The interest rate gap between Korea and the U.S. is also feared to widen further if the Fed increases its benchmark rate by 50 basis points this month. Under that scenario, the gap would widen to a historic high of 1.75 percentage points.
This may end up prompting more foreign capital outflow here. According to data from the Korea Exchange, foreign investors are on a selling spree of Korean stocks in recent weeks. They sold local shares worth 300.3 billion won, a day after the BOK froze the key rate. They also dumped local shares for three consecutive trading days from the day.
The benchmark KOPSI also lost momentum for recovery. The mass sell-off by foreigners offset a surprise return of retail investors. The main bourse closed at 2,427.85 on Thursday, a slight gain of 0.62 percent from the previous trading day. The won-dollar exchange rate closed at 1,315.6 won, down 7 won during the same period.
Some critics argued that the BOK was somewhat hasty in its latest monetary decision, as the financial market widened volatility shortly after the decision.
"The central bank didn't give a clear signal of ending its hawkish policy, but the market already seems to think so," said Chang Min, a researcher at Korea Institute of Finance.
Others, however, say that the market was hit harder by external factors than the BOK's widely expected rate decision.
"Ever since the BOK's monetary board meeting in January, the central bank has not sent any clear signals of increasing the key rate," said Kang Hyun-ju, an economist at the Korea Capital Market Institute. "If the BOK increased the base rate during the February meeting, this must have come as a surprise to the market. The central bank also left open the possibility of an additional rate hike, even after freezing the rate, which was a step in the right direction."
He said the soaring exchange rate is not attributable to the BOK's rate decision, but a more hawkish turn of the Fed.
"In other words, the financial volatility here was affected more by external factors," he said.
The BOK will hold its next rate-setting meeting on April 13.
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