BOK Leaves Interest Rate Unchanged

The Bank of Korea’s (BOK) decision to keep interest rates at current levels indicates that although the pace of economic recession has slowed, it has been hard to raise the interest rate due to other bad economic conditions, including lackluster consumer spending and skyrocketing housing prices.

According to BOK, the current interest rate after its latest increase in August is at an acceptable level. The bank showed no sign of any further interest rate hikes.

Under the current situation, there will be no interest rate hike in the near future since changes in monetary policy might lead to public distrust in the market.

The BOK may have taken current economic conditions into account-

The greatest concern for the financial market was when the BOK wanted to decrease its call rate. The ruling party and several government officials called for a cut in interest rates in a bid to revive the country’s economy since prices were stable.

The Ministry of Finance and Economy expressed, “The BOK’s decision to freeze its call rate seems to have taken current economic conditions into account.”

Interest rate may rise next year-

There is the possibility that the Bank of Korea will switch over its policy to raising interest rates if inflation pressure builds up due to excessive liquid funds in the market.

The interest rate rise is not aimed at stabilizing real estate prices. However, we can adjust the interest rate by considering different macroeconomic variables, such as current economic conditions and prices.

It is hard to predict the call rate direction from next January since the BOK also feels the current call rate is lower than the optimal level.

Shin Yong-sang, head of the macroeconomics department at the Korea Institute of Finance, forecasted, “The BOK is optimistic about the future economy and shows fear of additional housing price increases, If this is the case, there is a great possibility of an interest rate increase.”

Meanwhile, senior researcher at the Samsung Economic Research Institute (SERI) Cheon Hyo-chan said, “It is hard to put significance on Lee’s remark about the fear of the real estate market. It will be hard to raise the interest rate if we consider the ripple effect on the macro-economy.

How will the BOK stabilize the real estate market?-

BOK Governor Lee Seong-tae said, “We are mulling over what measures we can take to stabilize the property market,” suggesting that the BOK is reviewing the possibility of monetary policies in order to stabilize the real estate market.

As a countermeasure against the real estate prices under the current conditions, the financial authorities are considering ways to apply the Loan-to-Value (LTV) and Debt-to-Income (DTI) ratio rules to the non-speculative regions as well.

As for the possibility of limiting the loan amount of each bank, Lee hinted of difficulties by saying, “Although it is not illegal, it is far from being a common market mechanism.”

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