Call Rate Rises for Second Consecutive Month

The Monetary Police Committee (MPC) of the Bank of Korea raised its call rate from an annual 4.75% to 5.00% on August 9. It was the first time the MPC has raised the call rate for two consecutive months since May 1999 when the call rate was adopted as a floor rate. The rate has entered the 5% range for the first time since July 2001.

To explain the raise, Lee Seong-tae, the governor of the central bank, said, “Liquidity is still enhancing rapidly and loans on credit remain high.” Lee added, “The increase will slow down the scope of financial instruments,” signaling that there will be no further raises in the near future.

The call rate increase drove up the rate of treasury bonds by 0.06% to an annual 5.32% rate, and the rate of certificate of deposits, which is the base in determining the mortgage rate, went up to 5.21% - the highest since July 2001. Commercial banks are likely to increase interest on loans as they did previously in line with the call rate increase.

The KOSPI index, which opened higher due to the yesterday’s announcement of the inter-Korean summit, and the U.S. bullish stock market, started gaining at the opening, but closed at 1,908.68 (0.28% higher, up 5.27 points) due to the call rate increase.

ssoo@donga.com aryssong@donga.com