Bank of Korea Raises Call Rate 0.25%

On June 8, the Bank of Korea (BOK) Monetary Board raised the overnight call rate, the basis of market interest rates, by 0.25 percentage points, the fourth increase since October 2005.

The call rate now stands at an annual 4.25 percent, a record high since May 2003.

As soon as the call rate increase was announced, commercial banks such as the Kookmin Bank, Shinhan Bank, Woori Bank, Hana Bank and the Korea Exchange Bank (KEB) declared that starting from June 9 or June 12, they would raise their deposit interest rates by 0.1-0.3 percentage points. An increase in loan interest rates will soon follow, putting more burdens on debt-ridden households and businesses.

The call rate raise had a negative impact on the stock market. On June 8, the Korea Composite Stock Price Index (KOSPI) closed at 1,223.13, down by 43.71 points (3.45%) from the previous day. This is the biggest decrease since June 11, 2004 when the index fell by 3.93%.

As the reasons behind the call rate increase, the BOK cited that inflationary pressures are likely to be higher due to high oil prices and economic recovery and that real estate prices are soaring.

BOK governor Lee Sung-tae said, “The Monetary Bond believes the real estate prices of some areas centering on the Seoul Metropolitan Area are too high,” by which he possibly meant that they need to stabilize the real estate market by controlling the money supply.

Chief Researcher Park Jae-ryong of the Samsung Economic Research Institute (SERI) analyzed, “As the call rate increase is slight, its impact on the real estate market will be limited, but it will certainly be perceived as a ‘warning.’”

With regard to concerns over a possible economic slowdown in the second half (from July through December), Lee forecasted, “Unless international oil prices or the value of won increase drastically, the economic upturn will continue, though not at a pace as rapid as in the beginning of this year.”

Kyung-Joon Chung news91@donga.com