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Stock market volatility expands despite dovish Fed
By Lee Min-hyung
The interest rate gap between Korea and the United States has risen to a historic high of 1.75 percentage points following the U.S. Federal Reserve's unanimous decision to increase interest rates by a quarter percentage point to a range of 5 to 5.25 percent.
This increases pressure on the Korean economy amid concerns of an exodus of foreign capital in search of higher returns. The Bank of Korea (BOK), which is slated to hold its next rate-setting meeting on May 25, also faces a dilemma over its future monetary policy.
The BOK's monetary policy board froze its key rate twice at 3.5 percent during the past two meetings in February and April.
Economists argued it is reasonable to say that the Korean central bank's rate hike cycle has virtually come to an end despite lingering concerns about the rate gap with the world's largest economy.
"The BOK does not necessarily have to follow in the footsteps of the Fed simply because of the increasing rate gap," Kang Hyun-ju, a research fellow at the Korea Capital Market Institute, said. "The won-dollar exchange rate does not show any alarming signs of volatility. The BOK is widely forecast to keep its key rate unchanged again."
Starting this year, the won-dollar exchange rate has been on a gradual rise to over 1,340 won per dollar. But the current level is not serious enough for the BOK to push for an additional rate hike, Kang noted.
"The exchange rate is not in a state of instability for the time being and other multiple economic indices also back up the need for the BOK's rate freeze in May," the economist said.
Consumer prices are also on path for a gradual stabilization. Recent data from Statistics Korea showed the country's consumer prices grew 3.7 percent in April from a year earlier. This was the first time in 14 months that the figure fell to below 4 percent.
But some other economists left open the possibility of the BOK taking a baby step by increasing its key rate by 0.25 percentage point this month.
"The foreign exchange market is still facing anxiety amid pressure from the widening rate gap between the two countries, so my view is that the BOK needs to increase its benchmark rate once more in May," Sung Tae-yoon, a professor of economics at Yonsei University, said.
Finance Minister Choo Kyung-ho positively assessed the Fed's signal for a conditional pause in its rate hike.
"The signal will cast a positive influence on the Korean financial and foreign exchange markets," Choo said at an emergency meeting of economic ministers, Thursday. "But there are lingering concerns of chronic inflation. Global financial markets are also in a state of unrest due to the U.S. banking crisis. Korea's financial authorities will heighten monitoring of the situation."
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| Dealers work at a Hana Bank dealing room in Seoul, Thursday. Yonhap |
Stock market volatility is forecast to expand here despite the Fed's dovish turn, according to analysts.
"Concerns of overheated leveraging in the local stock markets are diminishing after the latest scandal on stock price manipulation, which led to abrupt price falls of some listed shares," Choi Yoo-joon, an analyst at Shinhan Securities, said.
Choi was referring to a recent collapse in the stock prices of eight companies following mass sell-offs through SG Securities Korea, the local branch of Societe Generale Group of France. The incident prompted prosecutors and the financial watchdog to launch an investigation into possible stock price manipulation by an investment consulting firm.
But the unceasing macroeconomic uncertainty makes it hard to predict when corporate earnings will be able to bounce back, according to the analyst.
"Estimates of earnings per share (EPS) will remain sluggish without an outstanding rebound for the time being, and there stands the possibility of an overall stock market slowdown until economic fundamentals recover," he said.
The benchmark KOSPI ended with a slight loss of 0.02 percent at 2,500.94 points, Thursday. The won-dollar exchange rate closed at 1,322.8 won per dollar, down 15.4 won.
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