South Korea Says Rate Increases May Fuel Foreign Capital Inflow
South Korea Says Rate Increases
SeongJoon Cho/Bloomberg
The country this week announced measures to control incoming foreign funds and prevent any sudden capital flight that caused a financial crisis in the region more than a decade ago.
The country this week announced measures to control incoming foreign funds and prevent any sudden capital flight that caused a financial crisis in the region more than a decade ago. Photographer: SeongJoon Cho/Bloomberg
South Korea may face the risk of a foreign capital influx and asset bubbles if borrowing costs are increased further to curb inflation, the finance ministry said.
“Raising interest rates to contain inflation could easily cause herd behavior in foreign capital inflow and create asset bubbles,” the Ministry of Strategy and Finance said in an e- mailed statement prepared for a ministerial meeting today on international economic policies.
The country this week announced measures to control incoming foreign funds and prevent sudden capital flight of the type that caused a financial crisis in Asia in 1997-98. Nations from Brazil to Taiwan are trying to limit currency swings as near-zero borrowing costs in advanced economies spur demand for higher-yielding assets in emerging markets.
“The Korean cabinet has often tried to pressure the central bank typically in this direction, to hold off on rate hikes when maybe the central bank is looking to hike rates,” said David Cohen, head of Asia forecasting at Action Economics in Singapore.
South Korean President Lee Myung Bak’s government in January started sending a vice finance minister to central bank policy meetings after Bank of Korea Governor Kim Choong Soo’s predecessor said the bank shouldn’t be too slow to raise rates.
Board members in May sought to have the official leave the room for the vote on rates, a step agreed to in June. The central bank started raising rates a month later.
Currency Gains
The won has appreciated about 33 percent against the dollar since March last year, the most in Asia, according to data compiled by Bloomberg. The currency slipped 0.2 percent to 1,150.75 per dollar as of the 3 p.m. close in Seoul, according to data compiled by Bloomberg.
The Bank of Korea left the benchmark interest rate at 2.5 percent this month after raising it by 0.25 percentage point in each of July and November from a record-low 2 percent. Inflation moderated to 3.3 percent in November from a 20-month high in October that breached the central bank’s 4 percent ceiling.
A rise in China’s inflation rate could drive up local prices by boosting import costs, the ministry also said in today’s statement.
South Korea’s gross domestic product is likely to expand 4.5 percent in 2011, compared with 6.1 percent this year, the central bank forecast in a statement on Dec. 10. Consumer prices may increase 3.5 percent next year, after a 2.9 percent gain in 2010, it said.
The government aims to apply a levy on banks’ foreign- exchange borrowings, will strengthen punishment for inappropriate reporting of currency trades and may tighten rules on derivatives, the ministry said on Dec. 20. The administration has already backed the revival of taxes on overseas investors in treasury and central bank bonds.
To contact the reporter on this story: William Sim in Seoul at wsim2@bloomberg.net; Frances Yoon in Seoul at fyoon2@bloomberg.net.
To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net
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