Another U.S. Interest Hike Could Threaten Korean Economy

Bank of Korea Governor Rhee Chang-yong on Wednesday tried to calm fears of an exodus of foreign capital if the U.S. Federal Reserve hikes the key interest rate again at the end of this month.

"There were three times in the past when the U.S. interest rate surpassed Korea's rate, but there were no major problems and there were some instances when foreign capital actually lowed into Korea," Rhee said. "Right now, a strong dollar has caused not only the won but all major currencies such as the euro, yen and yuan to depreciate."

A further weakening of the won would make it more expensive for Korea to import products and accelerate inflation. But Rhee said there will be no immediate capital outflow even if the Fed hikes the base rate by a full percentage point.

U.S. interest rates outpaced Korea's from June of 1999 to February of 2001, August 2005 to August 2007 and from March of 2018 to February of 2020 and Korea’s economy did not suffer any major impacts.

But at those times inflation was much lower, and the gap occurred during a global trend of lowering interest rates. But now sky-high consumer prices, a weak won and rising interest rates are combining, which could lead to an even wider trade deficit for Korea in the rest of this year after a record US$10.3 billion deficit in the first half.

Ha Joon-kyung at Hanyang University said, "Global oil prices were stable when interest rates reversed in the past, but what's different now is that oil prices are high and foreign capital is leaving."

And Kang Tae-soo at the Korea Advanced Institute of Science and Technology said, "Korea needs to sign a currency-swap agreement with the U.S. in order to calm jitters."