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Bank of Korea to Boost Reserve Ratio

Posted November. 24, 2006 06:50,   


The cash reserve ratio applied to short term bank deposits such as demand deposits with maturities less than a year will be raised by two percentage points from the current 5.0% to 7.0%.

It is the first time in the last 16 years and 9 months since February 9, 1990 that the cash reserve ratio of banks will be raised.

The Monetary Policy Committee (MPC) of the Bank of Korea (BOK) announced on November 23 that it would pass the bill on the adjustment of the reserve ratio and enforce it starting on December 23 in order to absorb the overflow of cash circulating in the market.

The BOK predicts that this measure will cut down the amount of funds loaned out by about 100 trillion won over the next year.

The MPC raised the capital reserve ratio of short-term deposits, such as demand deposits and money market deposits, from the current 5.0% to 7.0% at the meeting today.

It decided to attract the cash concentrated in short-term deposits toward long-term deposits by lowering the reserve ratio applied on long-term deposits such as long-term installments for house purchases, long-term deposits for workers and long-term deposits for households from the current 1.0% to 0%.

The reserve ratio applied to fixed deposits, fixed installment savings, mutual installments, housings installments, and certificates of deposits will be maintained at the current level of 2.0%.

With this measure, 4.8 trillion won will be added to the amount the general banks have to deposit in the BOK out of what they received as deposits, reducing the amount of money banks can loan out and raising interest on deposits and loans.

At a press conference this day, the chairman of BOK Lee Seong-tae revealed, “The [BOK] adjusted the reserve ratio since the liquidity in the market was not curtailed in spite of raising the call rate five times since October last year.”

“This measure was intended to complement the validity of the call rate policy, and therefore we have no intention of using it as an important currency policy,” Chairman Lee added.