Call Rate Decreases 0.25 Percentage Points to 3.25 Percent

On November 11, the Bank of Korea (BOK) decreased its call rate by 0.25 percentage points.

On the same day, the Federal Reserve Board (FRB) increased the standard rate by 0.25 percentage points on the grounds of a recovering labor market.

The Monetary Policy Committee decided on this day to lower the operating objective call rate by 0.25 percentage points to 3.25 percent.

After a reduction from 3.75 percent to 3.5 percent in August, this is another 0.25 percent point decrease in three months for the call rate, which is the interest rate applied to called money transactions among banks.

Park Seung, the governor of the BOK, said, “the recent decrease in international oil prices and the won-dollar exchange rate will help reduce the anxiety of inflation caused by the declining interest rate,” and that “by attaching greater importance to growth than inflation, we have reduced the call rate.”

He also explained, “The economic growth rate of the second half of this year will be lower than the first half, and next year’s first quarter’s (January to March) economic growth rate will be lower than this year’s second half,” and that “we cannot be reassured concerning inflation, but it is anticipated that for this year and the next, the inflation rate will remain in the target range.”

Related to the BOK’s intervention in the exchange market, he announced, “It is a measure taken to prevent an exchange rate crash due to mob psychology,” and that “we will justly admit the international trend of the bearish dollar.”

On the other hand, on November 11, the FRB increased the standard rate by 0.25 percentage points for the fourth time since this June.

The FRB announced that “the trend of economic growth is secure and the circumstances of the labor market are positive,” suggesting that they are planning to gradually increase the interest rate.

While the U.S., China, and Europe have been increasing the interest rate successively, Korea has decreased it two times this year, and as the gap between domestic and foreign interest rates increases, concerns of a capital outflow are rising. Also, despite increases in call rates in August, consumption and the financial difficulties of middle and small-sized firms have not improved and, as a result, the effect of the decreased call rate is controversial.

Cheol-Yong Lee Kwon-Heui Hong lcy@donga.com konihong@donga.com