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Experts Weigh Pros, Cons of Possible Interest Rate Hike

Posted October. 10, 2005 03:03,   


Four members of the Dong-A Il Bo Monetary Policy Committee, Gwak Sang-gyeong, Shin Min-young, Bae Sang-geun and Oh Seok-tae, made a case for leaving the call rate (benchmark interest rate) unchanged.

It would be premature to raise the call rate-

Gwak emphasized that raising the interest rate would do more harm than good, especially because the corporate investment remains sluggish and ordinary citizens are still under considerable financial burden.

He dismissed the argument that the call rate should be raised for fear of the possible capital flight caused by the difference in interest rates between Korea and the U.S., saying “Lower corporate profits and weaker national competitiveness have more to do with the capital flight than low interest rates.”

Shin and Oh explained that the higher interest rate would increase pressure on middle and low income families who are deeply in debt, widening financial and social polarization.

Oh added, “Low interest rates are often blamed for asset inequality by driving up the real estate prices. But what is more troubling is the income inequality which can be caused by higher interest rates.”

Bae argued, “Consumer prices have been stabilized, remaining below the lowest limit of the BOK’s target of 2.5~3.5 percent for the past four months. So there is no reason to raise the interest rate.”

It’s time to raise the rate-

But three other members, Shin Yong-sang, Lee Sang-jae and Ryu Seung-seon, strongly supported a higher call rate.

Shin said that excessive liquid funds that came from the long-standing low interest rate policy have lead not to production and consumption, but to speculation. According to him, there is a pressing need to let these funds flow into financial institutions, by raising interest rates gradually.

Lee explained that freezing the interest rate would undermine the stability of the financial market greatly, given that the bond market’s interest rate has already risen significantly on the assumption that the call rate would be raised.

Ryu said the nation should raise the interest rate to proactively deal with uncertainties like surging oil prices which can cause a hike in consumer prices, and to mitigate the adverse impact of the low interest rate, such as rampant short-term money flows.

He added that the government should send a signal to the market that it might raise the call rate once or twice, but it would not rush to raise the rate dramatically in an effort to avoid the additional surge in the market interest rate.

Dong-A Il Bo Monetary Policy Committee assesses the economic outlook-

Even though they were sharply divided over whether to raise the call rate or not, they agreed generally that the domestic economy is still unstable, although it is recovering gradually.

But supporters of the unchanged call rate attached more importance to the fact that there are still many uncertainties, while proponents of the higher interest rate emphasized the fact that the economy is on the right track to recovery.

Gwak said “There are temporary and partial ups and downs, but consumption and investment haven’t picked up yet in full-swing. And there are no signs of improvement in the job market.”

Lee and Ryu said the domestic economy has already turned around, bottoming out at the second quarter this year (April-June), despite remaining uncertainties, including surging oil prices.

Kyung-Joon Chung news91@donga.com