SEOUL-- South Korea said Thursday the Federal Reserve's plan to taper its bond purchases is expected to have a limited impact on the Korean financial market, but it will closely monitor the market due to potential volatility over global inflation risks.

At the latest policy meeting, the Fed on Wednesday (local time) froze the key interest rate near zero but said it will start to taper its massive asset purchases later this month amid the economic recovery from the pandemic.

At a news conference, Fed Chair Jerome Powell said the U.S. central bank would be "patient" before hiking the benchmark interest rate.

The South Korean government said the Fed's decision was widely in line with market expectations, but it will keep close tabs on the market as global inflation fears linger.

"If global inflation anchors longer than expected, it could cause market uneasiness due to uncertainty about the pace of the global economic recovery, and major economies' monetary policy directions," First Vice Finance Minister Lee Eog-weon said at a meeting on macroeconomics.

He said the government is ready to take measures to stabilize the financial market, if necessary.

The Bank of Korea (BOK) said it will pay special attention to the possibility of monetary policy shifts as uncertainty remain remains high over the pace of the tapering and the timing of a rate hike.

South Korea's stocks gained ground Thursday as investor sentiment was bolstered by expectations that the Fed is not likely to hike the key rate any time soon.

The benchmark stock price index rose 7.51 points, or 0.25 percent, to close at 2,983.22. The Korean currency closed at 1,182.60 against the U.S. dollar, down 1 won from the previous session's close.

Ahead of the Fed's meeting, South Korea's bond market rattled in recent sessions amid inflation concerns and uncertainty about the tapering of stimulus measures.

The return on three-year state bonds added 0.5 basis point to 2.108 percent Monday, the highest since August 2018. Bond prices move inversely to yields.

But bond prices rebounded after the government on Tuesday unveiled a plan to buy back 2 trillion won (US$1.7 billion) worth of government bonds soon.

Earlier in the day, Lee said the government will buy back five- and 10-year Treasurys on Friday to help ease the bond market.

Experts said if the Fed's tapering puts upward pressure on the BOK to hike the policy rate, Korean households and companies will face heavier debt-servicing burdens.

The BOK is widely expected to raise its key interest rate in November to tame inflation and curb household debt.

South Korea's central bank froze the benchmark rate at 0.75 percent last month after raising it from a record low of 0.5 percent in August.

"In the past, the Fed's tapering strengthened the dollar, sparking capital outflows from emerging markets. This time, the Fed's action may rather increase the risk of high interest rates," said Bae Min-keun, a senior economist at LG Economic Research Institute.

South Korea's high household debt has been cited as the main bugbear for the economy as it could sap private spending and hurt the economic growth.

Household credit reached a record high of 1,805.9 trillion won as of end-June, up 41.2 trillion won from three months earlier, according to central bank data.

The growth of household debt has shown no signs of letting up as more people have taken out loans to buy homes in anticipation of higher prices despite a series of government restrictions. Demand for unsecured loans also remains high amid a boom in stock investment.

In October, the financial regulator said it will enforce stricter lending rules based on borrowers' repayment capability at an earlier date than scheduled to curb soaring household debt.

Analysts said the Fed tapering is expected to put downward pressure on the Korean currency, but there would be no sharp weakness as the U.S. decision has been already factored in.

"The Korean won may not sharply fall versus the dollar from current levels as concerns about the tapering have been already digested in the market," said Baek Seok-hyun, a currency analyst at Shinhan Bank.

The Korean currency has fallen about 2 percent versus the dollar since September, with the won hitting a 14-month low of 1,198.80 on Oct. 12.

In 2013, the mere mention by then Fed Chair Ben Bernanke of reducing asset purchases sparked a market panic in what's called a "tapering tantrum," sending emerging markets' currencies sharply falling and bond yields spiking.

Source: Yonhap News Agency