March 22, 2018 / 12:38 AM / a year ago

UPDATE 1-S.Korea has contingency plan if market volatility flares up-vice finmin

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By Cynthia Kim and Dahee Kim

SEOUL, March 22 (Reuters) - South Korea said on Thursday it is ready to act to stabilise financial markets if necessary, yet brushed off concerns about the relative yield differential between Korean and U.S. base rates triggering sharp capital outflows from the economy.

Both the nation’s finance ministry and the central bank said they see limited impact from the Federal Reserve’s decision to lift the federal funds rate overnight, even if it means the U.S. now offers better yields to investors than South Korea.

“The base rate differential between South Korea and the U.S. reversed for the first time since 2007, 10-and-a-half years, and some worries this may trigger capital outflow from foreign investors,” Vice finance minister Ko Hyoung-kwon said in a meeting with counterparts from the Bank of Korea and financial regulators.

“But there won’t be a sharp capital outflow,” Ko said, adding that most foreign investors won’t flee for better yields as their investment in Korean assets is long-term based, and as a rosy corporate outlook keeps them in the market.

Bank of Korea Governor Lee Ju-yeol said he wasn’t sure whether a recent trimming of Korean treasury bonds by foreign investors is related to the narrowing yield differential between South Korea and the U.S. just yet.

“Its too early to see it as capital flowing out due to the yield gap,” Lee told reporters on Thursday.

Franklin Templeton Investments has sold about 1.2 trillion won ($1.13 billion) worth of its Korea bond holdings last week, three people familiar with the matter told

The policy meeting on Thursday was scheduled to assess the market impact of the Federal Reserve’s decision to lift the federal funds rate target range to 1.5 percent to 1.7 percent.

That is now higher than South Korea’s benchmark interest rate currently at 1.50 percent.

Ko also said the government will closely watch trade protectionist moves, as well as major political events scheduled for April and May including U.S-North Korea summit.

The Fed forecast at least two more hikes for 2018 and also nudged up its estimated longer-term “neutral” rate, the level at which monetary policy neither boosts nor slows the economy, in a sign the current gradual rate hike cycle could go on longer than previously thought.

Economists at Nomura believe the BOK is also keen to normalize policy but will proceed at a more gradual pace than the Fed. They see the next BOK hike in May, with another in November and two more in 2019.

Reporting by Cynthia Kim, Dahee Kim

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