BOK's Call Rate Hike Touches
Off Debate over Economy

BOK Gov. indicates a halt in overnight call rate hike

The Bank of Korea surprisingly raised its key interest rate by 25 basis points to 4.5 percent on Aug. 10, despite fears of the financial market and government officials and opposition party that the rate hike may accelerate an economic slowdown.
BOK's overnight call rate to 4.5 percent marks the highest since September 2001. The central bank raised the short-term inter-bank rate by 1.25 percentage points over five occasions. It froze the benchmark rate to 4.25 percent on July 7 in a move to calm down the uncertainties on the financial market in the wake of North Korea's test-launch of missiles.
BOK Gov. Lee Seong-tae said in a meeting with reporters following the bank's interest rate-setting Monetary Policy Committee, "Prices have been so far quite stabilized, but the rate was raised because pressure to increase inflation is likely to be building up for the time being."The business community and private think tanks released a barrage of criticism against the rate hike, saying that Korea's economy has turned to a downside stage. Korea's economy grew a mere 0.8 percent in the second quarter (April-June) of the year, the lowest in one year. The overnight call rate hike touches off a series of deposit and lending rate increases, leading to a cooling of the economy.
BOK Gov. Lee said the BOK would take more flexible monetary policies after taking into account diverse factors affecting the economy, indicating no further overnight call rate hikes for the time being.
On the same day, the Korea Composite Stock Price Index (KOSPI) fell 0.58 percent to close at 1304.31, whereas the KOSDAQ index gained 0.58 percent to 555.53 to the news on the deployment of WiBro to the United States.
Following the BOK's short-term rate increase, commercial banks announced a plan to raise deposit and lending rates one after another. Shinhan Bank increased its deposit rate by a maximum of 0.3 percentage points.
The BOK's latest short-term rate hike came as a shock as it raised the benchmark rate despite strong opposition from the business community and private think tanks.
The president of a private research institute described BOK Gov. Lee's decision on the call rate hike as the governor's gambling. He was apparently referring to an independent line BOK Gov. Lee is taking in spite of government and business leaders'call for not to raise the overnight call rate due to the side-effects it may have on the economy.
Gov. Lee is called a hawkish person who attaches priority on price stabilization and the BOK's independent role of setting the interest rate.
Private research institutes shared the view that two conditions are prerequisite to justifying the interest rate hike: the first one is whether the pressure to push up inflation is materialized in reality, and the other is about whether the economy is on the rise, but at a slower pace. But they have disputed the BOK's call rate hike, citing that the economy, which has already entered the slowdown phase, is forecast to continue a recession by the first half of next year.
In reality, economic indices have already sounded an alarming bell. Gross domestic product (GDP) rose 0.8 percent, the first one below the 1 percent level in five quarters. Korea posted a current account deficit in the first half of the year, the first one in nine years.
Consumption was not brisk. Department sales declined 0.1 percent in July over the same period of last year in the wake of downpours, while discount store sales also dropped 0.1 percent.
The Consumer Expectation Index plunged 3.1 points to 94.3, a drop for the fourth straight month, according to figures, released by the National Statistical Office in July. The Samsung Research Institute reported that the Consumer Sentiment Index plunged to 45.4 in the third quarter (July-September) of the year, 3.9 points lower than the previous quarter. Economic constituents have pessimistic views about the economy during the second half of the year. Manufacturers'Business Survey Index declined six points to 77, the lowest level since one year. The index below 100 means that there are more people who have negative views about the economy.
However, the BOK said the economic growth showed signs of slowdown, but the economy has not entered the recession phase. BOK Gov. Lee said the economic indexes for July were not off the mark. GDP dropped below the 1 percent level for the second quarter, primarily due to the sluggish construction industry, but an overall economic situation seemed to be positive. Newsworld.co.kr nw