BOK Likely to Cut Overnight Call Rate

The Bank of Korea is expected to cut the overnight call rate at its meeting on May 13, as controversy over the effect of the rate cut on stimulating the economy has grown.

The central bank is expected to reduce the benchmark short-term interest rate by 0.25 percentage points to 4.0%, the first cut since last May’s 0.25 percentage point cut.

"Whether to cut the call rate should be decided considering macro-economic conditions. It should be considered that the economic slump has persisted due to unexpected factors including SARS," Park Jae-hwan, senior official at the Bank of Korea said.

"The fact that the rate cut will cause real estate speculation is not true," he said. "Speculation in the real estate market is related to other factors, such as supply and demand in housing. Therefore it should be solved using government policy."

When the central bank holds its meeting on May 13, it is expected to have an intensive discussion on the impact of SARS, and the North Korean nuclear crisis on the Korean economy and whether the economy will pick up in the second half. If it concludes that the damage resulting from SARS is larger than expected, it will reportedly cut the benchmark rate.

The Bank of Korea has already decided that the rate cut is necessary to boost investment and consumer confidence after forecasting this year’s growth rate at lower than 4%.

However, the aftermath of the central bank’s rate cut is likely to be that significant in that some raise questions about its effect on economic stimulation and some worry about speculation on the property market.

Kwu-Jin Lim mhjh22@donga.com