SEOUL (Reuters) - South Korea’s central bank said on Friday the possibility of massive capital flight from Asia’s fourth-largest economy due to higher U.S. interest rates is small at present and that it plans to keep monetary policy at home accommodative.
The Bank of Korea said in a regular report on its monetary policy that previous outflows have been driven by local economic weakness and the spread of global financial market uncertainty, not the gap in interest rates between South Korea and the United States.
“With the rise in U.S. market rates there may be some bond-related flows leaving the country but we expect the size of those flows to be limited enough to not lend a serious impact on bond markets,” the BOK said in the report.
The Bank of Korea’s monetary policy rate currently stands at a record low of 1.25 percent, while the Federal Reserve is widely seen to raise interest rates to a range of 1.25 percent to 1.50 percent by end-2017.
A majority of analysts see the BOK keeping rates unchanged until it starts normalising them next year.
Meanwhile, the South Korean central bank said although it sees the country’s negative output gap persisting through 2018, domestic consumption is expected to improve as uncertainties from political risks at home are dissipating while households’ perception of the economy turns positive.
An output gap is the difference between an economy’s maximum potential output and actual output.
The report comes a day after the BOK said the economy grew a stronger-than-expected 0.9 percent in the first quarter, accelerating from a 0.5 percent expansion in the final three months of last year and the fastest pace since last spring.
Reporting by Christine Kim; Editing by Sam Holmes