Merrill Lynch: Korea should drop rates

U.S. securities firm Merrill Lynch & Co. Inc issued a recent report that said Korea needs to further lower bank deposit interest rates in order to restore the stability of its financial market. The company also raised the question of Hyundai Group`s liquidity problem, saying it would have a negative impact to the market over the short term. The report went on to say that prospects of the Korean financial market depend upon whether it normalizes domestic capital flow.

Merrill Lynch said that local investment trust companies marketing tax-free financial products have caused an influx of over 5 trillion won to the stock market. However, the yield realized from this was almost the same as bank deposit interest. Local banks lowered deposit interest by an average of 0.5 points this month. The Merrill Lynch report forecast that the stock market would recover when the gap between deposit interest and the yield of the capital market`s financial products widens enough. The U.S. firm also indicated that a second round of financial restructuring, including integration of financial institutions, is vital for normalization of Korea¡¯s financial industry. The report predicted that the second round of financial restructuring would materialize at the end of this year, noting that normalization of the domestic capital market would not occur until early next year.