BOK Raises Call Rate to 3.5 Percent

The Bank of Korea (BOK) Tuesday raised the benchmark short-term call rate by 25 basis points to 3.5 percent from 3.25 percent.

It is the first time the BOK has raised the call rate since May 2002.

The interest hike benefits renters but burdens households or companies with heavy debt.

BOK Governor Park Seung cited the following as the reasons for the rise: confidence in economic recovery, price instability, increase in the interest rate gap between Korea and the U.S., and inducement of a virtuous cycle of resource distribution.

Park said, “The economic growth rate is forecast to increase to 4.6 percent in the second half this year and 5.0 percent next year. However, the consumer price inflation rate, which is currently stable, is expected to exceed three percent next year. Therefore, there is a need to take a precautionary step beforehand.”

Regarding additional increases in the call rate, he said, “We are open to all possibilities. We need a monetary policy that will boost economic recovery by next year,” implying that there will not be successive interest hikes for the time being.

Commercial banks also have raised the interest rate for deposits.

Kookmin Bank decided to raise the interest rate of a fixed deposit by 0.1~ 0.45 percent points starting October 13. Korea Exchange Bank and SC First Bank decided to increase the interest rate of a fixed deposit by about 0.2 percent points starting October 17.

The hike in the call rate was not received as a surprise by the financial market since the increase has already been factored into the market.

In the bond market, the yield on a treasury bond with a 3-year term to maturity decreased by 0.04 percent point to close at 4.64 percent per annum.

The composite stock exchange index posted a record high of 1,244.27, up by 17.09 point (1.39 percent) from the previous day.

Kyung-Joon Chung news91@donga.com sublime@donga.com