S. Korea's central bank approves reserve ratio hike

South Korea's central bank decided Thursday to hike the reserve ratio on deposits, the first such move in 16 years, in order to reduce the money supply and help stabilize real estate prices.

In a regular meeting, the seven-member Monetary Policy Committee at the Bank of Korea approved boosting the reserve ratio on money market deposit accounts and demand deposits to 7 percent from the current 5 percent. On long-term deposits, the policymakers approved a cut of the ratio to zero from 1 percent.

It is the first time for the central bank to increase the reserve ratio on won-denominated deposits since February 1990. The new ratio will be applied from Dec. 23. A sharp rise in domestic credit and money supply led the central bank to reach the decision.

"Banks need to reduce their loan supply," Bank of Korea Gov. Lee Seong-tae said after the meeting. "We believe that local lenders will be able to counter any negative impact from the decision on their bottom line with their brisk profits."

The reserve ratio refers to the percentage of customer deposits that banks are required to set aside in cash. If the central bank boosts the ratio, local commercial banks will have difficulty in handing out loans, a factor that will reduce the overall money supply and stabilize property prices.

The central bank chief, however, declined to link property prices to the ratio hike.

"The policy is not solely targeting the real estate prices," Lee said.

"The hike will complement the central bank's call rate decision by reducing liquidity through curbing lending capability."

Some economists have said that the central bank should boost its monthly target for the call rate to curb housing prices, but the central bank chief has been countering the analysis, saying the call rate decision cannot be solely aimed at targeting housing prices. South Korea's government has been on high alert this month as apartment prices soared in Seoul and adjacent areas despite a set of strong property regulations last year.

It is difficult to say that the reserve ratio hike will have an impact on the bank's key rate decision next month, Lee said. The policymakers will decide next month's target for the call rate according to the economic environment in December.

South Korea's Finance Ministry supported the central bank move.

"The Finance Ministry was informed of the reserve ratio hike on Wednesday," said Lim Seung-tae, chief of the ministry's financial policy bureau. "We have maintained our stance that the ministry will support the decision."

Commercial banks, on the other hand, expressed disappointment with the move.

"The ratio hike will have a direct impact on both corporate and housing loans," an official at a local commercial bank said on condition of anonymity. "If so, the measure could deal a blow that is stronger than the central bank's key rate hike."

The reserve ratio tends to have a direct impact on the money supply, unlike the central bank's rate hike, which tends to have about a six-month time lag before the policy fully affects the market, according to analysts. Since October last year, the central bank has raised the key rate five times to a five-year high of 4.5 percent.

According to analysts, the central bank may counter any negative impact on corporate loans by coordinating with the financial watchdog. The financial watchdog may encourage local lenders to boost loans to small and medium-sized businesses, while suppressing mortgage loans.

The South Korean government last week announced a fresh set of anti-speculation measures to curb property prices, which many analysts fear could eat away at growth momentum. The new measures center on increasing the housing supply and strengthening the supervision of home-backed loans.

Seoul, Nov. 23 (Yonhap News)