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Korean Economy Braces For More Future Challenges

By March 13, 2017 at 8:11 am
As of end-February, South Korea had the world's eighth-largest foreign currency reserves. (Photo : Ryan Peirce/Getty Images)

The Korean economy is bracing and facing another major challenge as the U.S. Federal Reserve is preparing for a rate hike this week. Some analysts said that the American central bank will possibly increase its fund's rate after its policy meeting on March 14 and 15.

With this, Korean economy will be placed in a tighter spot and will also affect the Korean central bank. As the bank was hit by low private consumption on household debt and high unemployment, it was caught between calls for a rate decrease because of a low growth and the increases to one implemented that of the U.S.

The economy of the United States is making the most of its multiple tailwinds at the outset of 2017 like the strength in the single-family housing market, strong momentum in employment growth, sharp rebound in energy-sector capital spending, and the signs of rising price inflation as reported by Korea Times.

There has been forecast that the U.S. economy will grow and boost to 2.3 percent this year and will grow further next year as what can be seen in the Trump's administration's fiscal stimulus. However, in the opposite, Korean economy looks hazy.

Korea has been regarded as the nation which has the fourth largest economy in Asia but it looks like it will be suffering a strong blow this year. Some of the factors that will lead to this are Trump's protectionism, U.S. rate hikes and the China's economic retaliation over the Terminal High Altitude Area Defense or the THAAD.

The rate hike which will be implemented by U.S. will prompt the Bank of Korea to follow suit in order to preserve the capital and prevent it from exiting the local market. But the problem is that Korea's household debt is increasing and is relatively high at over 1,340 trillion won.

Because of this, Korea will be vulnerable to a rate hike and it will be very unlikely that the Bank of Korea will lower the rate just at this point. The bank also shared that it already used some of its available monetary resources like a rate cut to 1.25 percent last June.

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