April 27, 2024

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An electronic board showing the Korea Composite Stock Price Index (KOSPI) at a dealing room of the Hana Bank headquarters in Seoul on Tuesday. (Yonhap)

Simmering fears over a sharper-than-expected US Federal Reserve rate hike amid red-hot US inflation dragged down South Korea’s benchmark Kospi below the 2,500 mark for the first time in 19 months on Tuesday. It closed at 2,492.97 points, after dipping to as low as 2,457.39 at one point. The Fed will hold a two-day interest rate-setting meeting starting Tuesday (US time). Some forecasts say the Fed will raise the key rate by 75 basis points in light of surging US inflation.

Foreign investors -- who hold roughly one-third of Korean stocks -- carried on a sell-off, outweighing a buying spree from institutional and retail investors. Shares of market bellwether Samsung Electronics dropped to 61,900 won ($47) apiece, marking a new 52-week low for a third session straight.

Financial authorities scrambled to steady the jumpy markets.

Financial Services Commission Vice Chairman Kim So-young said Korea faces uncertainties complicated by persistent inflation, global policy tightening and geopolitical tension in Ukraine at a meeting with key financial institutions the top financial regulator called on Tuesday.

“We could see the expanding market volatility shifting to financial companies and systems. We’ll take every precaution to ensure they are financially sound and liquid enough,” Kim said. He stressed that the FSC is preparing for contingencies, though he did not present concrete steps.

Meanwhile, Lee Seung-heon, senior deputy governor of the Bank of Korea, convened an unscheduled meeting with senior officials at the central bank and discussed ways to counter a spillover from a prolonged market tumble.

“Ahead of the US Fed meeting, rates are rising and shares are falling, while the US dollar is edging higher,” Lee said. “We will keep our eye on it for as long as it is needed and take measures to calm the markets if that becomes necessary.”

Analysts said the Kospi will seesaw until the Fed decides on the rate hike.

“The speculation over a steeper-than-expected liftoff is what’s weighing on Korean markets,” said Seo Sang-young, head of the media contents department at Mirae Asset Securities.

The latest data on Korean consumer prices from the Organization for Economic Cooperation and Development is another reason behind a market rout, Seo added.

The OECD has said consumer price increases in Korea for this year will hit a 24-year high. The Bank of Korea has already lifted interest rates three times this year, doing so at every policy meeting except for the one in February.

Hwang Sei-woon, a senior research fellow at the Korea Capital Market Institute, said retail investors, who usually are the last ones to join a sell-off led by foreign and institutional investors, are showing signs of leaving the markets to take advantage of the soaring borrowing costs.

“Savings accounts have become more popular since the rate shot up,” Hwang said.

The BOK, which has raised interest rates by 1.25 percentage points in five stages since July last year from the record low of 0.5 percent to 1.75 percent, is expected to lift borrowing costs in July.

By Choi Si-young (siyoungchoi@heraldcorp.com)