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The Korea Herald
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THE INVESTOR
March 28, 2024

Market Now

Fed taper to have limited impact on Korean market

  • PUBLISHED :November 05, 2021 - 10:58
  • UPDATED :November 05, 2021 - 10:58
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First Vice Finance Minister Lee Eog-weon spaeks during a meeting on macroeconomics at the Bank Hall in Seoul, Nov. 4. (Yonhap)

The US Federal Reserve’s decision to dial back its bond-purchasing program in November will have a limited impact on the South Korean financial market, the Korean government said on Nov. 3 while vowing to monitor market uncertainties surrounding the inflation outlook in the US.

As widely expected, the Federal Open Market Committee, the US Fed’s monetary policymaking body, announced that it would reduce its bond purchases by a total of $15 billion a month starting in November.

It left its benchmark rate unchanged at a target range of between 0 percent and 0.25 percent, citing the need for a labor market recovery.

“The global financial markets are expected to easily digest the result from the FOMC,” First Vice Finance Minister Lee Eog-weon said during a meeting on macroeconomics.

After opening 1 percent higher, the benchmark Kospi closed at 2,983.22 points, up 0.25 percent from the previous session.

The Korean currency was trading at 1,182.40 won against the greenback, down 0.03 percent.

“If global inflation anchors longer than expected, it could cause market uneasiness due to uncertainty about the pace of the global economic recovery, and major economies’ monetary policy directions,” Lee said.

Bank of Korea Deputy Gov. Park Jong-seok echoed Lee’s remarks. “The results of the FOMC meeting were generally in line with market expectations, and the international financial market was stable.”

Korea’s central bank is forecast to raise its base rate at a rate-setting meeting in November to curb inflation, which accelerated to a near 10-year peak in October.

The BOK froze the benchmark rate at 0.75 percent last month after raising it from a record low of 0.5 percent in August.

“However, uncertainty related to policy decisions such as tapering speed and the timing of interest rate hikes is still high due to concerns about future inflation (in the US),” Park said, emphasizing that there is room for changes in policy conditions in the future.

The US inflation rate rose to a 13-year high of 5.4 percent in September, sparking expectations among investors that the US will hike interest rates by the summer of 2022.

For the sovereign bond market, which has shown excessive volatility amid global inflation risks and talks of tapering stimulus measures, the government has decided to take several actions.

In October alone, the three-year government bond yield jumped by 51 basis points, more than double the US’ 24 basis points, to top 2.1 percent for the first time in three years.

In November, the government cut the issuance of state bonds with three-year maturities to 8 trillion won ($6.77 billion) from 12.5 trillion won in October.

It also plans to buy back 2 trillion won worth of government bonds, chiefly those with midterm maturities, on Friday to stabilize the bond market.

This follows a 2 trillion won buyback on Wednesday to smooth peaks in the bonds’ maturity profile, putting total bond buybacks this week at 4 trillion won.

“The programs are expected to have positive effects such as easing supply and demand conditions and improving market sentiment,” he said.

By Park Han-na (hnpark@heraldcorp.com)



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