Korean stocks swung between gains and losses Thursday, after the U.S. Federal Reserve flagged risks to the U.S. economy from turmoil in global markets and indicated it would raise interest rates gradually.

The benchmark KOSPI index settled at 1,906.94 points, 0.48 percent higher than the previous day, after dropping to 1,877.78 in early trading. The Korean won lost ground to 1,208.5 won per dollar, after the Fed kept its key interest rate untouched in a two-day meeting in Washington. 



“That the Fed is acknowledging the risks for economic recovery stemming from recent financial market turmoil is positive,” said Park Jung-woo, an analyst at Korea Investment & Securities in Seoul. “It also signals a lower chance of an interest rate hike in March.”

The U.S. central bank’s rate decision was widely expected. What markets around the world were watching more closely was any hint of a change in the Fed’s outlook for the American economy and possibly in the pace of future interest rate hikes.

In December, the Fed delivered its first interest rate hike in nearly a decade, which it said was the beginning of a “gradual” monetary tightening cycle. Many expected a second rate hike in March.

In a statement released Wednesday, the Fed said it was “closely monitoring global economic and financial developments while assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”

“It is a backpedal from December when it said risks were balanced,” said Jeong Dong-hyu of Shinyoung Securities.

“The weakened confidence in the U.S. recovery is a factor weighing down on the Korean stock market, but if any signal for a slower pace of tightening emerges, that will help the local market,” he added.

The pace of U.S. monetary tightening has been a key concern for Korea, which fears higher interest rates in the U.S. would accelerate the outflow of global funds from emerging markets.

Korea’s central bank said Thursday it will stick with its monetary easing policy for the time being, citing downward pressure on inflation. The Bank of Korea earlier this month froze its key rate at a record-low 1.5 percent.

The BOK, in a report released Thursday, forecast consumer prices to rise 1.4 percent this year, lower than a 1.7 percent on-year increase predicted earlier and its inflation target for 2016-2018 of 2 percent.

“Consumer prices are expected to continue facing downside pressure from the demand side, while on the supply side, the impact from low oil prices will likely last,” the report said.

By Lee Sun-young & Bloomberg
(milaya@heraldcorp.com)