BOK Raises Overnight Call
Rate to Preempt Inflation

Gov. Lee hints another call rate hike in the late June Monetary Policy Committee meeting

The Bank of Korea raised its inter-bank overnight call rate by 0.25 percentage points to 4.25 percent in a bid to keep inflation in check on June 8.
BOK's latest call rate hike is the fourth one since the Central Bank began to raise the benchmark call rate, the interest charged on overnight inter-bank loans, since last October when it reacheds to a record low of 3.25 percent, and it is the first one since BOK Gov. Lee Seong-tae's inauguration.
Market analysts shared a prevailing view over the possibility of freezing the overnight call rate, but unlike expectations, BOK held its monthly Monetary Policy Committee meeting on June 8 and decided to raise the short-term call rate in consideration of inflation fears.
BOK's call rate hike may be in keeping with a global trend of raising interest rates following U.S. Federal Reserve Chairman Ben Bernanke's indication of a possibility of another rate hike designed to fight inflation.
Fed Chairman Bernanke told a conference organized by the American Bankers Association in New York on June 5 that he was concerned about signs of inflation in the United States, suggesting the possibility of raising the Federal Reserve rate from 5 percent to 5.25 percent during the Federal Open Market Committee Meeting scheduled to be convened on June 29. Japan and Europe are expected to follow suit.
Commenting on the background behind the latest increase of the overnight call rate, BOK Gov. Lee told a news conference he held during the monthly Monetary Policy Committee meeting that amid the continuing economic recovery, crude oil price hikes have put the pressure to increase prices, and real estate prices are also on the rise. Lee also indicated another short-term interest rate hike, saying that financially tightening policies would be eased a little if the national economy continues to turn around.
The prime reason for BOK's overnight call rate hike is to stabilize real estate prices. Financial authorities see the need for raising interest rates to put the volatile real estate market in check. In reality, domestic banks posted a rise in household loans to 4.6 trillion won, representing the highest level in 43 months, requiring a raise in the overnight call rate.
BOK Gov. Lee brushed aside concerns about the slowdown of economic recovery, saying that strong exports and reviving consumer and corporate capital spending.
Recognizing the inevitable factors of BOK's overnight call rate hike, some analysts warned a possibility that the short-term interest rate raise could have a negative impact on the economy a deepening economic slowdown. They cited that the interest rate hike may be feared to make SMEs with a burdensome load of heavy debts worse and weaken the contracted consumer sentiment, thus exacerbating an economic decline.
Some analysts also noted that the latest overnight call rate hike was designed to reduce the widening gap between Korean and U.S. call rates, which has become a cause for a big burden for BOK.
The latest overnight call rate hike sent the benchmark Korea Composite Stock Price Index (KOSPI) nose diving 43.71 or 3.5 percent to close at 1,223.13, the biggest one-day decline since June 11, 2004. KOSPI tumbled again on June 8 in the wake of BOK's overnight call rate hike after it plummeted following Fed Chairman Bernanke.
The value of the Korean currency fell 5.20 won to close at 953.40 won against the dollar, reverting to the 950 range in about 20 days after closing at 952.30 on May 22.
Commercial banks simultaneously raised deposit and lending rates following BOK's benchmark short-term interest rate hike. Woori Bank decided to increase deposit rates by 0.1 to 0.2 percentage points starting June 12.
Hana Bank has already raised deposit rates by 0.1 to 0.3 percentage points, while Kookmin Bank decided to increase deposit interest rates by 0.1 to 0.3 percentage points starting June 12. nw

BOK Gov. Lee Seong-tae