The Bank of Korea Says "Even if Korea-US Interest Rates Invert, High Possibility of Foreign Capital Net Outflow Is Unlikely"

Announcement of Monetary Credit Policy Report

[Asia Economy Reporter Seo So-jeong] The Bank of Korea (BOK) forecasted that even if the policy interest rates between Korea and the United States become inverted, the possibility of a large-scale net outflow of foreign securities investment funds is not high.

In the Monetary and Credit Policy Report released on the 8th, the BOK stated, "Concerns have been raised about a large-scale outflow of foreign securities investment funds due to the interest rate inversion between Korea and the U.S. after the U.S. Federal Reserve (Fed) raised its policy rate by 0.75 percentage points at once in July."

During the previous three Fed rate hike periods, the policy interest rates between Korea and the U.S. were all inverted, with the maximum inversion range reaching 87.5 to 150 basis points, yet foreign securities investment funds recorded a net inflow of $16.9 billion to $40.3 billion during this period.

The report also cited that Korea’s bond yields are relatively favorable compared to its credit rating, and that the high proportion of public funds (central banks, sovereign wealth funds, international organizations) with a long-term investment tendency for diversification purposes limits the possibility of outflows. According to the BOK, the investment ratio of public funds in foreign bond investments was 21.7% at the end of 2010, 58.5% at the end of 2015, 71.7% at the end of 2020, and 61.9% at the end of June 2022.

Furthermore, regarding equity investment funds, a significant portion of foreign portfolio adjustments occurred during the COVID-19 crisis, and the stock prices have already undergone a substantial correction in the first half of this year, which also limits the possibility of additional outflows. According to the BOK, as of the end of July, the foreign ownership ratio of Korean stocks was 26.4%, the lowest level since May 2009 during the global financial crisis.

The BOK stated, "In the past, large-scale outflows of foreign securities funds in Korea were mainly caused by global risk events such as the global financial crisis (2008), China’s financial instability (2015), and the COVID-19 crisis (2020), rather than by the inversion of domestic and foreign interest rate differentials." It explained that various factors such as exchange rate outlook, domestic and international financial and economic conditions, and investors’ investment strategies interact complexly in foreign securities investment fund flows beyond interest rate differentials.

However, if global risk factors intensify and international financial market conditions deteriorate more than expected, there is a possibility of expanded capital outflows in Korea as well. The report emphasized, "Due to the acceleration and intensification of the Fed’s high-intensity tightening, escalation of the Russia-Ukraine conflict, and worsening of China’s economic slowdown, capital outflows may expand not only in most emerging countries but also in Korea. It is necessary to closely monitor the flow of foreign securities investment funds while paying attention to the development of risk factors that could significantly impact international financial markets."

This content was produced with the assistance of AI translation services.