Fed's rate hike likely to cut 15 tln won in foreign investment in Korea: think tank

SEOUL, Sept. 26 (Yonhap) -- The U.S. Federal Reserve's likely lifting of its benchmark interest rate this week may result in the reduction of foreign investment in Korea by up to 15 trillion won (US$13.4 billion), a local think tank said Wednesday.

If the Fed raises the federal funds rate by 25 basis points to a range of 2-2.25 percent on Wednesday (U.S. time), the resulting rate gap between the two countries is expected to reduce foreign equity investments in Korea by 8 trillion won and foreign direct investments by 7 trillion won, the Korea Economic Research Institute (KERI) said in a report.

The KERI is a think tank that belongs to the Federation of Korean Industries, the country's biggest business lobby.

The Fed has strongly hinted at four interest rate hikes this year, with the markets anticipating the third increase in September and the fourth in December.

But South Korea has kept its key interest rate at 1.5 percent, lower than the current U.S. range of 1.75-2 percent.

"If the rate gap between South Korea and the U.S. widens further, foreign investors may remove some of their capital in Korea and other emerging markets in portfolio reorganization, seeking stable assets, such as the dollar," KERI researcher Lee Seung-seok said over the phone.

He forecast the Bank of Korea will raise the base rate within this year to keep the rate gap with the U.S. from widening further.

"A widened rate gap between the two countries could result in financial volatility in (South Korea), where household debt reached a whopping 150 billion won as of June," he said.

The U.S. economy has reported robust growth, historically low unemployment and a soaring stock market in the past 10 years since the latest global financial crisis. The Fed is trying to keep the economy from overheating by raising the key lending rate.

kyongae.choi@yna.co.kr
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