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

2017/03/16 11:21

(ATTN: UPDATES lead paras with BOK's response, other details)

By Lee Chi-dong

SEOUL, March 16 (Yonhap) -- The latest U.S. interest rate hike poses a dilemma for South Korean policymakers, sandwiched between calls for further stimulus measures and worries about the narrowing rate gap between the two countries, observers here said Thursday.

The Fed raised its policy rate by 25 basis points to a range of 0.75 to 1 percent overnight, versus the 1.25 percent of the Bank of Korea (BOK), in a widely expected move.

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

But it adds pressure on Seoul's rate-setters with the local economy plagued by drawn-out sluggish domestic consumption and a high jobless rate.

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

A silver lining was Federal Reserve Chair Janet Yellen's commitment to a gradual approach. She made it clear that the central bank won't rush to take additional steps.

Many market watchers stick to their forecast of two more increases this year and three in 2018.

BOK officials stressed that they will maintain a prudent approach, saying they won't respond "mechanically" to the Fed's move.

"The U.S. benchmark rate is an important reference index, but our rate should be considered from the domestic perspective," Jang Byung-wha, the BOK's senior deputy governor, told reporters.

He added the BOK will take the real economy and financial situations at home into account.

Although the BOK seems to have bought some time with Yellen's announcement of a slightly dovish stance, experts point out that it has come under increased pressure.

"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 number 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.

In the case of 1999, foreigners sold a net 5.5 trillion won (US$4.8 billion) in South Korea's equity market between May and September, the institute's data showed.

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 1,340 trillion won. 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."