Currency response after U.S. rate hike: S.Korean expert

South Korea should respond to the expected interest rate hike in the United States by devaluing its currency rather than cutting its policy rate further, a South Korean economic expert said Monday.

Kim Jeong-sik, economics professor at Yonsei University, said at a forum in Seoul that it needs to minimize further rate cuts even under the deepening of economic slump caused by the U.S. rate hike.

The U.S. Federal Reserve decided last week to keep the federal funds rate unchanged at the near-zero level, citing economic uncertainties abroad and financial market fluctuations in the past month.

Fed Chair Janet Yellen commented on the strength of the U.S. economy during her press conference, hinting that the rate hike was on its way.

Professor Kim said that China and Japan won opportunities for economic growth as the economies responded to U.S. rate hikes in the past with currency policies.

South Korea, however, responded with rate cuts on worries about the slump in private expenditure after the U.S. rate increase in 2004, resulting in asset price bubble and the hard-landing of the economy, Kim said.

The economist advised the devaluation of the South Korean currency rather than rate cuts in response to the U.S. rate hike as the effect of rate cuts on investment and consumption would be restricted amid the aging population and lower growth potential of the economy.

If the devaluation of the South Korean currency to the U.S. dollar leads to growth in exports, it would boost the export- driven economy, raise the country's creditworthiness and prevent foreign capital outflow, Kim said.

The Bank of Korea (BOK) lowered its benchmark interest rate by a percentage point over a year to an all-time low of 1.5 percent in June.