Despite dovish Fed, Korea remains vigilant

Uncertainties remain in Korea even as the markets celebrate the U.S. Federal Reserve's "baby-step" rate increase.

Finance Minister Choo Kyung-ho speaks at a meeting held in central Seoul on Thursday following the Federal Reserve’s rate increase by a quarter percentage point. [YONHAP]

Uncertainties remain in Korea even as the markets celebrate the U.S. Federal Reserve's "baby-step" rate increase.

The Fed's Federal Open Market Committee (FOMC) raised the federal funds rate by 0.25 percentage points on Wednesday to a range of between 4.50 and 4.75 percent, and the Nasdaq jumped 2.00 percent. That was followed by the Kospi rising 1.49 percent and the Kosdaq 1.85 percent on Thursday.

"We are staying on our toes," said Finance Minister Choo Kyung-ho on Thursday morning, ticking off a number of concerns, including inflation and weak exports.

Korea’s inflation inched up in January to a three-month high of 5.2 percent, while the trade deficit hit a record $12.69 billion.

“The market interprets that uncertainties have somewhat been resolved from the latest FOMC result, which was shown in the stable global financial markets,” he added.

Volatility in Korea’s financial market has eased as a result of the government’s market stabilization measures and expectations about adjustments in the speed of monetary tightening in major countries, Choo said.

He cited a fall in bond yields and the strengthening of the won.

Two-year government bond yields fell 35.3 basis points in January, while those for 10 years dropped 43.3 basis points. The won appreciated 2.6 percent in the same month.

In comments after the rate increase, Federal Reserve Chair Jerome Powell said “we’re talking about a couple of more rate hikes to get to that level we think is appropriately restrictive.”

He also mentioned disinflation.

“I think for the first time that the disinflationary process has started. We can see that and we see it really in goods prices so far,” Powell added.

The minister vowed to expand primary collaterized bond obligation (P-CBO) support to help companies with lower credit ratings issue corporate bonds. Improving project finance guarantees and capital market operations so they are more in line with international standards are other measures being taken by the ministry.

Bank of Korea Senior Deputy Gov. Lee Seung-heon said volatility in the global financial markets could grow due to the difference in the Fed's view on inflation and the market's.

Lee said taking preemptive and active market stabilization measures is a must, as increased volatility could affect the foreign exchange market and the inflow and outflow of capital.

The Bank of Korea upped the base interest rate by a quarter percentage point last month to 3.50 percent. The central bank is holding the next Monetary Policy Board meeting on Feb. 23.

BY JIN MIN-JI [jin.minji@joongang.co.kr]