BOK Expected to Raise Call Rate in 3rd Quarter
By Na Jeong-ju
Staff Reporter
Debates are heating up over when the Bank of Korea (BOK) will raise its benchmark short-term interest rate after BOK Governor Lee Seong-tae hinted at adopting a tighter monetary policy to stem rapid growth of liquidity.
The country may see a call rate increase before October, given the upcoming presidential election slated for December, analysts say. The central bank has said politics has nothing to do with its monetary policy, but the presidential election is not just a political topic.
Opinions are divided on the exact timing of a rate increase: Some say it will take place as early as next month, while others say August or September is the best time.
Whatever the case, the bank seems to be resolute in defusing the potential negative impact the liquidity growth will have on the economy.
``The BOK has sent stronger messages about its fight to stem the oversupply of money. An interest rate hike is only a matter of time,'' said Kim Dong-jo, a Samsung Securities analyst.
Since BOK Governor Lee signaled a call rate hike early this month, the interest rates for bonds have surged here, reflecting expectations for a rate rise. Still, some traders caution the market should wait for a firmer message from the central bank about whether it will keep a tight monetary stance until the end of this year.
``South Korea is not the only country experiencing excess liquidity. It is a global phenomenon,'' said Han Jae-joon, a research fellow at the Korea Institute of Finance. ``A call rate increase may raise the value of the Korean currency globally, dealing a setback to Korean exporters. In this regard, a rate increase is a difficult decision for South Korea.''
Most analysts forecast the BOK will raise its call rate target in the third quarter and if it doesn't, the rate will be kept unchanged until the end of this year.
``One of the main concerns of the BOK is that rapid liquidity growth may spur home prices and make the housing market volatile,'' Kim of Samsung Securities said. ``If the housing market becomes unstable, the BOK will try to bring it under control using tighter monetary policy.''
He said the anticipation for a call rate increase has already been reflected in the bond market. If the rate hike becomes reality, short-term interest rates will rise further, reducing their gap with long-term rates, he said.
The tighter monetary policy is in line with the around-the-globe moves to slow rapid asset growth by applying higher interest rates. To keep up with China, Japan and the United States _ the country's key trade partners _ South Korea is expected to move to tighten its monetary policies for the time being.
What bothers the BOK is rising inflationary pressure from sharp liquidity growth.
``We will closely monitor the money supply as rapid liquidity growth could, over the long term, build up inflationary pressure,'' Governor Lee said on June 12. On June 7, the bank's monetary policy committee kept its benchmark interest rate steady at 4.5 percent for the 10th straight month since August last year.
Analysts agree rises in mortgages and loans to small and mid-sized enterprises (SMEs) as well as stronger overseas short-term borrowing by Korean firms are emerging as key factors that could put the economy in trouble.
Han of the Korea Institute of Finance said the oversupply of loans to SMEs and households will further erode the profitability of lending institutions.