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Rate Hike Could Signal Global Downturn

Posted June. 10, 2006 03:34,   


“P,” an analyst at a securities company, was searching international financial news articles yesterday morning and became heavy-hearted.

That is because news of an interest rate hike from central banks of six regions in the world was released simultaneously the previous day, including a call rate increase by the Bank of Korea.

In effect, this was a global “domino effect” of an interest rate increase that happened in just 24 hours.

Suffering repercussions of a global rate hike, global stock markets, raw material markets and foreign exchange markets significantly fluctuated.

On June 8 (local time), central banks of six regions (Korea, EU, India, Turkey, South Africa and Denmark) raised their rates one after another. Thailand increased its rates on June 7 and Canada did the same on May 24.

Big Movement of International Funds-

Many countries are raising their interest rates to curve inflation caused by low interest rates and booming economies that have continued over the past three to four years.

As an effect of the global rate hike, international funds are moving as well.

On June 8, the price of gold futures for August delivery dropped by $18.80 at the New York Mercantile Exchange, marking the lowest price since April 13. That day, the copper price also went down by 6.2 percent at the London Metal Exchange, the lowest price in a month. Dropping raw material prices are not necessarily bad, but it is a possible sign of a global recession.

The LG Economic Research Institute stated in its report released yesterday, “The recent downward trend of asset prices is not a temporary phenomenon but a phenomenon derived by changes in basic economic conditions,” analyzing, “The era of low interest rates and high growth that continued for three to four years is coming to an end.”

Furthermore, the U.S. is highly likely to increase interest rates again at the Federal Open Market Committee which will be held on June 29. With Bank of Japan and People’s Bank of China suggesting that they would stop the “zero interest rate policy” and raise the rates further in their second half of this year, respectively, it is predicted that global economic contraction would continue.

Dark Clouds over the Korean Economy-

Korea is also not immune from repercussions of the global economic slump caused by a global interest rate hike. Despite a brief rally yesterday, the KOSPI Index went down to the same level as seven months ago after taking a nosedive for four consecutive days through June 8. Net sales by foreign investors reached 550 billion won on June 9 alone. The total amount for May stands at 3.4153 trillion won, the largest amount in history.

Predictions are that a global economic contraction would have a negative impact on households by causing a fleeing of foreign investors, a drop of asset prices including stocks and real estates, and the slowdown of consumption, and that companies would experience a slowdown of export markets, sluggish growth rates and contraction of new employment and investment.

The Consumer Expectation Index released by the Korean National Statistical Office decreased for four consecutive months to 98.0, the first drop below the 100 mark in eight months, which indicates that consumer sentiments are quickly diminishing.

Hyun-Jin Park TK Sohn witness@donga.com sohn@donga.com