[Editorial] Interest Rates Frozen for 9 Months

The Bank of Korea (BOK) has decided to freeze August's call rate at 3.25 percent. It is "nonperforming" for nine months now despite accusations that the low interest rate is not helping the economy and is contributing to the real estate bubble. It is rather sad because it would have been a good opportunity to send the market a positive sign by raising it. The repeated increases in the US interest rate has reversed the balance between US and Korean interest policy, and with the actual market rates rising recently it would have been natural to have raised the call rate. BOK chairman Park Seung did hint that an increase would not be that far off in the future, but he has made statements that allowed people to think such things in the past. The market has grown more immune to what he says.

What is of concern is that if the move keeps getting postponed until domestic and international circumstances leave no choice, the increase will unavoidably have to be a big one. It will have that much bigger of an influence on the economy and make achieving a rational adjustment of the rate more difficult. It is hard to understand the decision by the BOK's monetary policy committee when you look at documentation about domestic and international economic trends issued by BOK leadership that says the economic recovery will spread gradually during the second half of this year. The reason everyone had agreed on the need to raise the rate to stabilize the real estate market but hesitated anyway was because of the economy as a whole. If that is how it's going to be it will take time to have interest policy achieve the desired effect, and raising the rate would also make sense given the need for offensive monetary policy.

The BOK monetary policy committee is also wrong for trying to avoid doing anything that it would have to be responsible for. It recognizes that the low rate is one of the causes behind the bubble in the real estate market, but it leaves dealing with that to government real estate policy. The market is going to remain unstable when it is overflowing with low interest money. The BOK policy committee has to realize that it is in a central position of responsibility.

The Hankyoreh, 12 August 2005.

[Translations by Seoul Selection (PMS)]