1%-Point Interest Rate Differential: A Tipping Point for Massive Capital Outflows?

Abstract

The Bank of Korea (BoK) has reacted in a somewhat different manner from other emerging central banks. The BoK’s policy rate has frozen in the range of 1.50 percent during the past seven months since November 2017. The rate gap between the Fed and the BoK expanded to 0.50 percent points after the June FOMC meeting. The global financial markets expect two more rate hikes by the Fed this year. There has been a strong argument that capital outflows are unavoidable in situations where the interest rate gap between the Fed and Bok widens to over 1%-points. What poses a threat to financial market participants and policy makers is a massive "sudden stop" of capital movements.