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(News Focus) U.S. rate hike adds pressure on S. Korean economy

2017/03/16 06:55

By Lee Chi-dong

SEOUL, March 16 (Yonhap) -- The move by the United States to tighten its monetary policy is posing new challenges for South Korea's economy, which is already coping with difficult times amid the slowing down of growth, observers in South Korea said Thursday.

Policymakers in Asia's fourth-largest economy are understandably in a dilemma as the Fed raised the target range for federal funds rate by 25 basis points to 0.75 to 1 percent overnight.

The expected U.S. rate hike, the second in three months, reflects confidence in its economic recovery, a positive element for South Korea's exports that have shown clear indications of a rebound.

But the move is weighing on Seoul's rate-setters amid calls for additional stimulus measures to turn around sluggish domestic consumption and a high jobless rate. The Bank of Korea (BOK) has kept the short-term policy rate at 1.25 percent since June last year.

Fed Chair Janet Yellen in a file photo. (EPA-Yonhap) Fed Chair Janet Yellen in a file photo. (EPA-Yonhap)

At the start of this year, many market watchers predicted that the Fed would begin the rate hike in the second quarter.

Thursday's decision, however, signals speedier action, reducing the interest rate gap between the U.S. and South Korea that is fueling worries about capital outflows.

Some expect the Fed to increase rates two or three more times within the year.

"The Fed's rate hike raises the issue of how long South Korea can freeze its rate," said Joo Won, a senior researcher at the Hyundai Research Institute.

He cited a record of foreign investors rushing to sell off South Korean shares in 1999 and 2005 when the nation's standard rate was lower than that of the U.S.

If the Fed jacks up the rate once again, the BOK will be forced to consider a hike as well, the analyst added.

The problem is that the central bank has little room for maneuvering with the local economy already in trouble.

An image of the Bank of Korea in a file photo provided by Yonhap News TV. (Yonhap) An image of the Bank of Korea in a file photo provided by Yonhap News TV. (Yonhap)

South Korea's economy is said to be on the threshold of chronic low growth, with the BOK forecasting economic expansion at "just" 2.5 percent this year.

Outstanding household debt here has exceeded 1,300 trillion won (US$1,137 billion). A higher rate means more debt burden.

The overall unemployment rate hit a seven-year high of 5 percent in February and that for those aged 15-29 stood at 12.3 percent mainly due to manufacturers' job cuts. The fate of Daewoo Shipbuilding & Marine Engineering Co., the nation's top shipyard, stands at a crossroads, as much of its debts mature in April.

Multiple data suggest that consumers are continuing to tighten their belts and purse strings.

Seoul is also bearing the brunt of Beijing's economic retaliation over its decision to allow Washington to deploy its advanced missile defense system THAAD on the peninsula.

Given the difficulties, the BOK seemed tempted to lower the rate, but the Fed is making such a move very difficult.

Under such circumstances, the BOK is apparently running out of time and ammunition, pundits pointed out.

"Should the U.S. keep raising rates, South Korea with a small and open economy has no other choice but to follow suit," Ha Joon-kyung, a professor at Hanyang University, said. "(The authorities) need to get the public aware of the increased risks to household debt and get the bond market to prepare for more risk management."