Interest rate hike expected amid housing boom

A meeting of the Monetary Policy Committee of the Bank of Korea.

Critics on both sides stress need to deflate housing bubble

Ahead of a government monetary policy meeting slated for October 9, many market observers are forecasting an interest rate hike. This is a turnaround from the widespread belief held up until late last month that the state-controlled Bank of Korea (BOK) would freeze the interbank call rate at 4.5 percent.

The interbank call rate is the interest rate banks charge on loans to "preferred customers," such as brokerage firms. It also controls the marginal interest rate charged on loans to general customers.

Officials argue that an interest rate hike is needed to curb rising property prices. According to industry data, the average cost of houses in South Korea grew 1.3 percent in October, the highest monthly gain in three years and five months. President Roh Moo-hyun blamed the sharp increase in property prices on financial policies, and the presidential office posted a briefing that called for a rate hike to cool off the real estate market.

BOK head Lee Seong-tae has repeatedly called for an interest rate hike. "It is a problem that the interest rate is only in the 4-5 percent range," Lee said in a lecture on October 26. He thinks that the relatively low interest rate is behind the skyrocketing housing prices, as it has allowed too much money into the market. In September alone, 24 trillion won (US$25 billion) flowed into the market.

Market observers also see an interest rate increase as a possible scenario.

"An interest rate hike of up to 0.50 percentage points will not increase the burden on the economy," Oh Suk-tae, the chief economist at Citibank Korea said. "The monetary policymakers should show their determination to remove the current bubble in the real estate market."

But some economists oppose a rate hike. "Since adjustment of the interest rate could have an indiscriminate impact on the economy, it is not appropriate in terms of real estate issues." Vice Finance Minister Bahk Byong-won said.

Song Tae-jung, an economist at the LG Economic Research Institute, echoed this view. "At a time when the nation’s growth potential has fallen to the 4 percent range, I don’t think it is appropriate to say that the current interest rate is low." He added, "A rate hike would have a debilitating impact on next year’s economy."

Some support an interest rate hike, but at the same time express worry that the right timing for such a move has already passed. Others say that a rate increase could worsen the financial burden felt by households by raising borrowing costs.

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