Hot Debate on Reduction of Call Rate

``Because Korea economy may fall into recession due to the slow-down of the U.S. economy, the financial authorities should establish more flexible measures such as the additional reduction of the interest rate.`` (Kang Bong-Kyun, the president of Korea Development Institute)

``Korea`s consumer prices increased by 5.4 percent in May higher than 5.3 percent of the previous month. Hence, some has pointed out that the interest rate should be raised due to the prolonged unstable consumer prices. As for now, it is very hard to lower the interest rate.`` (a member of the Monetary Policy Committee)

Ahead of the Monetary Policy Committee (MPC) which will be held on 7th, the issue of an interest rate cut has generated the controversy among the government, the KDI, the Bank of Korea (BOK), and the financial sector. The government and the Korea Development Institute (KDI) have maintained that the call rate should be lowered in order to stimulate the economy. They stress that ``the reduction of the interest rate is the overall tendency around the world. The U.S. lowered 2.5 percent, from 6.5 percent to 4.0 percent this year, and the European Central Bank (ECB) also cut down from 4.75 percent to 4.5 percent on 10th last month.``

An official of the Financial Policy Bureau of the Ministry of Finance and Economy (MFE) told that ``the increase of the consumer price in May derived from the decline of consumer price (0.1 percent) in May of the last year. Since the consumer price will be settled from June, it is more desirable to cut down the call rate.``

However, the BOK has taken the negative stance toward the reduction of the call rate. One member of the MPC told that ``the prospect of the consumer price and the economy of this year was established based on the money exchange rate of 1,200 won for one dollar. But since the money exchange rate has stayed in the 1,300 won level, the pressure of the price hikes is strong``. The other member of the MPC also told that ``while the interest rate cut has little impact on the recovery of the economy, it instigate the unstable market sentiment``. Another member of the MPC pointed out that ``because the economy may become worse next year, the policy measure should be set up in preparation for the possible economic difficulty``.

The debate over the interest rate has provoked the despute over the evaluation on the current economic situation.

Jin Nyum, the Deputy Minister and the Minister of Finance and Economy, told that ``although it is clear that the sentiment of consumers, entrepreneurs and investors took a turn for the better, it is hard to see that the economy will fully recover``. Kang Bong-Kyun, the president of the KDI, supported Jin`s opinion, saying that ``the rate of the economic growth (3.7 percent) has improved in the first quarter of this year when compared to the fourth quarter of last year. However, the unpredictable economy of the U.S. does not allow for the easy anticipation the economic prospect of the second half of this year``.

On the other hand, ``The economy had been the worst in the fourth quarter of last year, but currently the worst slump is over,`` said Chon Chol-Hwan, the governor of the BOK, ``Although the money exchange rate has shown the stable tendency and the pressures of the price hikes has been lessened, it will be hard to maintain the goal of the price control of this year (4 percent ) due to the rise of the oil price.``

Many point out that the interest rate cut is nothing but a matter of time. Mike Newton, an economist of the HSBC Bank in charge of Asian regions, prospected in the report `Korea: bumping along the bottom`, that ``the increase rate of the consumer price has recently shown the rising tendency, but it will be stabilized in the second half of this year. Therefore, the BOK will cut down the call rate by 0.75 percent in order to stimulate the economy``. Jang Young-Kyu, the head of the bond analysis team of the Samsung Securities Co., analyzed that ``the call rate will not be reduced at the MPC on 7th. Probably, it will be cut down at the end of this month when the stabilization of the consumer price is confirmed, or on July``.

hcs@donga.com