[2023 National Audit] Bank of Korea "Foreign Securities Capital Inflow Despite Korea-US Interest Rate Inversion"

"The Israel-Palestine War, Limited Impact on Domestic Financial and Foreign Exchange Markets"

The Bank of Korea reported that despite the inversion of the Korea-US interest rate differential, foreign securities funds continue to flow in.

The Bank of Korea made this announcement in the business status report submitted ahead of the National Assembly's Planning and Finance Committee audit scheduled for the 23rd.

The Bank of Korea explained, "Although concerns have been raised about the outflow of foreign securities investment funds due to the inversion of the Korea-US interest rate differential, foreign securities funds have continued to flow in since the second half of last year when the interest rates inverted," adding, "In the past, foreign securities funds generally recorded net inflows even during periods of inverted Korea-US interest rate differentials."

According to the Bank of Korea, foreign securities funds recorded a net inflow of 21.63 billion dollars from July 2022 to September 2023.

This is mainly attributed to the fact that foreign securities funds fluctuate due to complex factors including domestic and international financial and economic conditions, exchange rate outlook, and arbitrage incentives, in addition to the Korea-US interest rate differential.

Lee Chang-yong, Governor of the Bank of Korea, also responded to questions about exchange rate fluctuations and concerns over foreign currency outflows caused by the inversion of Korea-US interest rates during a press conference held immediately after the Monetary Policy Board meeting on the 19th, stating, "The interest rate differential itself cannot be a policy target," and explained, "It largely depends on expectations about how it will change in the future and whether the change will accelerate."

The Bank of Korea also reported that the impact of the war between Israel and the Palestinian armed group Hamas on the domestic financial and foreign exchange markets has been limited so far.

According to the Bank of Korea, although risk-averse sentiment has somewhat strengthened since the outbreak of the war, the impact of remarks by US Federal Reserve officials suggesting a possible pause in interest rate hikes has been more significant than the preference for safe assets, resulting in a considerable decline in government bond yields and a rise in stock prices.

The Bank of Korea explained, "With expectations of easing monetary tightening by the US Federal Reserve, the US dollar weakened, leading to a decline in the won-dollar exchange rate. Foreign stock investment continued to show net selling, but the scale has decreased."

It added, "Based on past cases, if this situation does not spread due to interventions by neighboring countries, the impact on the domestic financial and foreign exchange markets is expected to be limited."

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