BOK Faces Calls to Lower Interest Rate
By Na Jeong-ju
Staff Reporter
The central bank needs to lower its key interest rate as soon as possible to ease volatility in the bond market, some economists said Sunday.
In a report, Shin Yong-sang, a research fellow at the Korea Institute of Finance, cautioned foreign investors may raise investments in bonds here further for short-term interest gains, taking advantage of the interest gap between South Korea and the United States.
``Foreigners have increased bond investments rapidly since early January, prompting sharp falls in bond rates'' Shin said. ``In view of the widened interest gap between Seoul and Washington, the BOK should cut its interest rate as quickly as possible and stabilize the bond market.''
He warned that the capital inflow into the bond market may grow at a faster pace as the Bank of Korea (BOK) is sticking to a hawkish monetary stance. Despite inflation risks, it kept its monthly call rate target unchanged at 5 percent for the sixth consecutive month on Feb. 13, citing growing downward pressure on the economy.
The U.S. Federal Reserve slashed its key interest rate to 3 percent in late January to fight recession, widening the gap between Seoul and Washington to 2 percentage points, the highest level in three years and six months.
As of the end of last year, foreign ownership of bonds here stood at only 0.6 percent. The ratio surged to 4.9 percent as of the end of January. The average net buying of bonds by foreign investors surged to 154 billion won a day in January from 7.2 billion won in December, according to the report.
``The rapid rise in foreign bondholding is posing serious threats to market stability,'' Shin said. ``Most of the investments are viewed as seeking short-term gains. If they move to realize gains in unison, the market will be shaken.''
He proposed the BOK take preemptive action to stabilize the market by cutting the interest rate at the earliest possible date.
Other analysts said many market participants are doubtful about whether the current call rate target is at an appropriate level.
``The BOK is forecast to hold its interest rate steady, but many people feel a rate reduction is necessary,'' said Kwon Jeong-ho, an analyst at Korea Investment & Securities.
``Consumer prices rose above our target range of 2.5 to 3.5 percent in December and January, and may continue strong growth in the first half.'' The central bank, however, said the growth pace is expected to slow in the second half.
Bank of Korea Governor Lee Seong-tae indicated that the BOK may move to cut the interest rate, saying the economy is exposed to growing downside risks, but has not commented about its timing.
Many analysts forecast the BOK will drop its hawkish stance in the late second quarter.