The warning followed the central bank's decision to raise its benchmark rate by 25 basis points earlier in the day, a move Lee said was largely in line with market expectations.
Speaking at a financial market monitoring meeting, Lee pointed to elevated volatility in South Korea's stock market.
"Continued instability in the Middle East and the possibility of further U.S. interest rate hikes could further increase volatility in financial markets," he said.
Lee instructed officials to closely monitor sector-specific risks that could arise from higher interest rates, including tighter financing conditions for companies and increased debt-servicing burdens for vulnerable borrowers.
The FSS said it will also strengthen oversight of financial institutions and closely monitor margin lending and unsettled stock trading at brokerages, as heightened market volatility could trigger forced liquidations and amplify losses for retail investors. It added that it will respond promptly to any signs of market stress.
The regulator will also continue monitoring the foreign exchange market following South Korea's transition to 24-hour won trading, including exchange rate movements, trading volumes and financial institutions' foreign currency funding conditions.
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