The Bank of Korea does not expect a large-scale capital flight from Korea to the extent of rocking the equity and foreign exchange markets, but nevertheless sees the need to normalize its rates upon signs of more strength in the domestic economy, said its governor Lee Ju-yeol.

Until the last monetary policy meeting, Lee maintained that monetary policy should be directed mainly by domestic factors rather than the tightening pace in the U.S. and elsewhere after pointing to subdued inflation and worsening job data at home.

“We may have to make additional moderation in loose monetary policy if the economy runs closer at potential growth rate and if inflation nears the target,” Lee told reporters on Tuesday.

The dovish governor did not use his usual stress on “careful judgment” before making a move on the accommodative policy.

“Prices will improve towards the latter half,” but uncertainties are still high at home and abroad. “We will decide on monetary direction after a thorough examination of the economy in July,” he said.

The central bank will issue revised outlook for the economy after a monetary policy meeting on July 12.

The hint of another increase comes amid signs of foreigners’ cashing in Korean equities after the U.S. Federal Reserve last Wednesday bumped up the policy rate target to 1.75-2.0 percent by a quarter of percentage point for the second time in the year as inflation nears 2.0 percent target. It signaled two additional hikes instead of one to make the benchmark rate average at 2.25 percent by the year-end.

Experts warn of capital flight if the gap in the interest rates in Korea and the U.S. widens beyond 50 basis points. The Korean benchmark rate has been left unchanged at 1.50 percent since November.

Foreigners turned heavy net sellers of Korean stocks since Thursday. Net sales in main Kospi shares until Tuesday reached 1.56 trillion won, sending the U.S. dollar above the 1,100-threshold for the first time in seven months on Monday for a finish of 1,109.1 won on Tuesday.

Bond prices rose as investors bet on increases in interest rates. The three-year government bond yield finished Wednesday morning 0.2 basis point higher at 2.166 percent after falling 1.4 basis points on the previous day. The main Kospi ended the day 1.02 percent higher at 2,363.91.

By Kim In-oh and Cho Jeehyun

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]