Deputy Prime Minister Lee Hun-jae’s Remarks Sent Shockwaves

Deputy Prime Minister and Finance and Economy Minister Lee Hun-jae made controversial remarks that seemed to press for an interest rate cut. His remarks came out on Tuesday, two days before the meeting of the Monetary Policy Committee of the Bank of Korea (BOK).

BOK officials expressed their displeasure since the bank has the authority over interest policies. The financial market was thrown into confusion; the yield on three-year treasury bonds fell below the call rate.

“For the economic recovery, the BOK should implement policies that are flexible to economic ups and downs,” said the minister during an interview with Bloomberg, the U.S. financial news agency. In other words, monetary authorities should aggressively lower the interest rate when the economy slows down, and raise the rate when the economy recovers.

“The deputy prime minister said that the government should expand its spending, and the interest rate should be cut in order to achieve five percent economic growth rate next year,” Bloomberg reported initially. The Ministry of Finance and Economy (MOFE), however, made it clear that the minister did not mention interest rate, and instead only talked about his own views.

Despite the explanation of MOFE, the minister’s remarks sent shockwaves to the market.

The Korean bond market fluctuated after the minister’s comment came out, and the yield on treasury bonds plunged.

The yield on three-year treasury bonds fell 0.04 percentage point from the previous day to 3.24 percent, which was lower than the call rate of 3.25 percent. The yield on five-year treasury bonds fell 0.06 percentage point to 3.33 percent.

Right after the minister’s comment, foreigners bought approximately 700 billion won worth of treasury bonds futures, betting on the call rate cut. It was the highest one-day net purchase this year.

Chi-Young Shin Kang-Woon Lee higgledy@donga.com kwoon90@donga.com