Korea-U.S. Interest Rates Gap Widens to Historic 1.5%

The U.S. Federal Reserve on Wednesday hiked the key interest rate by another quarter percentage point to five percent, the highest in 16 years.

That brought gap between the U.S. federal funds rate and Korea's base rate to a historic 1.5 percentage points, sparking fears of a capital flight from Korea.

"My colleagues and I are acutely aware that high inflation is causing significant hardship, and we are strongly committed to returning inflation to our two percent goal," Fed Chairman Jerome Powell said. "Although inflation has been moderating in recent months, the process of getting inflation back down to two percent has a long way to go and is likely to be bumpy... We will stay the course until the job is done."

The Fed had been expected to hike the rate by half a point but changed its mind due to last week's collapse of Silicon Valley Bank.

A wider gap between the interest rates of the two countries could prompt investors to pull their money out of the Korean market in search of higher rates abroad. But the Fed forecast that the benchmark rate will rise to no more than 5.25 percent this year or only another quarter percentage point, raising expectations that the Fed's rate-hike cycle, which began in March last year, could be coming to an end.

If the Bank of Korea keeps the base rate unchanged next month and the Fed raises its rate by another quarter percentage point, the gap could widen to a record 1.75 percentage points. In January, a reversal in the interest rates of the two countries led to a net outflow of US$5.29 billion from Korea.

Nonetheless the U.S. dollar fell W29.40 to W1,278.30 on Thursday on expectations that the rate hike cycle is ending, and the Korea Composite Stock Price Index rose 0.31 percent to 2,424.48 points. The junior Kosdaq fell 0.15 percent to 812.19 points.