Emergency Meeting on Macroeconomic and Financial Stability

Government Works to Improve National Fiscal Soundness and Manage Global Economic Challenges

Deputy Prime Minister Choo Kyung-ho presided over the Emergency Meeting on Macroeconomic and Financial Stability with BOK, FSC and FSS[1] on July 28. At the meeting, in response to the Fed’s interest rate hike, the major decisions of the FOMC July Meeting and the international financial market situation were reviewed and the impact of US-Korea interest rate reversal on the Korean financial market was discussed.

The following is a summary of DPM Choo’s opening remarks.

International financial market situation following the Federal Reserve’s interest rate hike

The U.S. Federal Reserve raised its key interest rates by 75bp (1.5-1.75% → 2.25-2.5%). The two consecutive 75bp increase was the biggest hike in 41 years since December 1980. The move pushes the reversal of the US-Korea interest rate gap to 25bp (based on the top of the range). However, the impact on the international financial markets was moderate as the market largely expected the increase, and therefore the impact on the Korean financial market is expected to be limited.

DPM Choo mentioned concerns over capital outflow due to the U.S. interest rate standing higher than that of Korea. However, despite three rounds of US-Korea interest rate reversals in the past, the net inflows of foreign funds into Korean securities continued. Also, Korea’s strong fundamental and appropriate responses to external challenges have much more influence on the capital flow.

In terms of Korea’s external soundness, Korea’s sovereign credit ratings remain at a record high based on its solid economic growth and fiscal soundness. The Korean economy is fully equipped with policy levers to respond to emergency rapidly and effectively including its foreign reserves[2], which is the ninth-largest in the world, and multi-layered liquidity supply chain system. Moreover, foreign net inflow into Korean stock and bond investment continued in July 2022.

Policy measures to improve national financial soundness and manage global economic challenges

Nevertheless, the government, BOK and related institutions will work to monitor and increase Korea’s overall financial soundness as well as to devise preemptive measures to manage global economic challenges, and push ahead with reforms in the entire financial market.

- Work on implementing measures[3] to stabilize the corporate debt market and CP markets to preemptively respond to volatility in the bond market due to the rapid interest rate increase

- Implement measures such as the government’s emergency buyback of KTBs and BOK’s purchase of KTBs in case of the excessive volatility in the bond market

- Reexamine the financial market stability measures utilized in the past and check if there is room for improvement in case that an extreme herding occurs in the financial market  

- Work to improve Korea’s financial market accessibility for foreign investors

- Prepare measures to advance the FX market in line with global markets to promote openness and competitiveness by Q3 2022

- Make efforts for Korea to join the FTSE World Government Bond Index by introducing a new tax scheme in the 2022 tax revision bill that exempts income and corporate tax on interest and capital gains derived from non-residents and foreign corporations’ investment in KTBs and monetary stabilization bonds

The government, BOK and related institutions stay more vigilant than ever by bracing for any possibilities. Going forward, we will take preemptive measures in accordance with contingency plans for each sector if necessary as well as closely monitor internal and external risk factors to the economy.