BOK to Freeze Call Rates at 4 Percent, Retain Trend of Low Interest for a While

The Bank of Korea (BOK) decided to retain the call rate, which is the standard for the open market rate, at 4.0 percent on the 10th, and low interest rates is likely to continue for the time being.

The Monetary Policy Committee (MPC), at the monthly meeting for January, decided to formally increase the provision of the currency to boost economic recovery under the condition that it does not threaten the price rise limit of 2002 (30 percent), because prices are not likely to rise for the present.

BOK supervisor Chon Chol-Hwan said after MPC, "We decided to keep the call rate at the present level for the recovery of the object economy, though there are some foreign and domestic worries."

BOK had lowered call rates by 1.25 percent 4 times for the recovery of economy last year.

Mr. Chon implied that low interests will continue for a while by saying, "Although market interest rates may rise in the hope for the recovery of business conditions, the range of increase will be limited because the recovery of the economy is not certain."

Along with the upkeep of the low interest rate, the notable thing in the MPC announcement was that BOK would increase the provision of currency to aid economic recovery. BOK raised the proper currency increase rate estimates by 8 ~ 12 percent from 6~10 percent of last year. That is to say, it will provide about 1100 trillion won increasing 80~120 trillion won from 1000 trillion won that it provided from January until September last year.

Kang Sung-Dae, examiner of BOK said, "It is natural that the rate of currency is slightly rising because the government`s goal for the economic growth rate is 4 percent with an increase of 2.8 percent (estimate) from last year."

Financial researcher Dr. Jung Han-Young responded, "Freezing the call rate is an appropriate measure. But the pressure to raise prices might increase with the recovery of domestic consumption, the rise of import prices due to the weak yen, the World Cup and so forth. In that case, BOK should be able to raise the rates appropriately regardless of political variables like the election."

"We are worried about the weaker value of the yen, but not about the absolute level of the exchange rate." said governor Chon in regard to the worries of some companies about the recent weak yen (the fall of won-yen exchange rate).

Seung-Ryun Kim srkim@donga.com · Rae-Jeong Park ecopark@donga.com