South Korea’s finance minister has dismissed short-term risks of capital outflows from the Asian economy as global interest rate differentials widen.
Choo Kyung-ho told CNBC at the Group of 20 meeting in Bali that capital outflows from a country aren’t caused by a single economic driver, such as interest rate differentials, because investors are influenced by other factors, such as an economy’s strength.
Choo, who is also the country’s deputy prime minister, acknowledged that there are concerns that the United States will raise interest rates more aggressively, and that the widening rate gap could lead to capital outflows from South Korea.
“The rate gap has happened before a couple of times, but we didn’t experience any major capital outflows,” he said Friday, according to CNBC’s translation. “Based on that, I think capital outflow doesn’t happen simply because of a rate differential.”
When assets and money leave one country for another in search of better investment returns, such as higher interest rates, this is referred to as capital outflow.
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The Federal Reserve of the United States raised benchmark interest rates by 75 basis points in June, the most aggressive rate hike since 1994.
The Federal Reserve of the United States is set to raise interest rates again at its July meeting, with some traders betting last week on an increase of up to 100 basis points, after consumer inflation in the United States reached a 40-year high of 9.1 percent.
The disparity in interest rates between markets, particularly with some markets, such as the United States, favoring more aggressive rate hikes, can start to drive hot money flows as investors seek higher returns.
In the past, capital flight has occurred in response to quantitative easing measures implemented by the United States following the subprime mortgage crisis, which included increased liquidity and lower interest rates.
The weakening of the US dollar pushed capital into other markets, such as emerging Asian economies, raising inflationary pressures and appreciating their currencies.
Source: CNBC.com
