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Central Bank Raises Call Rate to 3.5%

2005-10-11 (화)
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By Na Jeong-ju
Staff Reporter
The Bank of Korea (BOK) Tuesday raised the benchmark short-term call rate by 25 basis points to 3.5 percent, sending clear signals that the central bank is confident of an economic recovery.

It is the first time the central bank has tightened its monetary policy since May 2002, when it hiked the call rate by 0.25 of a percentage point to 4.25 percent. Since that time, the bank has lowered the rate on four occasions until November 2004 when the rate leveled out at 3.25 percent.

BOK governor Park Seung, who chairs the BOK’s rate-setting seven-member panel, predicted Korea’s economic growth rate will come in at 5 percent next year.


``Economic recovery has been more vivid since the second half, boosted by recovering consumption and strong exports,’’ Park told reporters following the panel’s monthly monetary policy meeting.

He downplayed concerns that the rate hike may pour cold water on the recovery. He said that the rate hike may augment inflation pressure, but its impact on the economy will be limited.

Despite the latest rate hike, Park said the central bank will maintain a low-interest rate policy to support the economic recovery. Still, he did not rule out further rate hikes.

``Current interest rate levels will not pose any deterrence to recovery,’’ Park said.

Analysts said the bank’s decision to hike the interest rate reflects confidence shared by both the BOK and the market for the outlook of the Korean economy.

Kim Joong-hyun, an analyst from Goodmorning Shinhan Securities, said the BOK’s rate hike was in line with expectations, so it will have a limited impact on the financial market.

``Policymakers have signaled a rate hike, and market participants have already been ready,’’ Kim said. ``There may be further rate hikes, but, at present, there is no likelihood that the market will be swayed by the BOK decision.’’


Woori Investment and Securities economist Hwang Chang-jung said he is focusing on the effects the rate hike will have on the real economy and the flow of funds and equities in the market.

``Past records show the real economy and the stock market dipped whenever the BOK raised the call rate,’’ Hwang said. ``The government uses the therapy to get some heat out of the economy, but it doesn’t seem that the domestic economy is overheated. I think its impact will be limited this time.’’

The BOK said the Korean economy is showing clear signs of an upturn, thanks to expanding consumer spending and brisk exports. Still, the economy is not on the right track because rises in facility investment and growth in the construction sector fall short of expectations, it said.

BOK officials indicated further rate hikes may take place until the end of the year, as long as consumer spending and exports keep growing. It expects the economy will grow at 4 percent in the second half, about one percent higher than growth in the first-half.

The BOK said the inflation pressure is not worrisome, but forecast that high oil prices may add more pressure to inflation.

Since the Korean economy began showing recovery signs in July, Governor Park has signaled that he may raise the call rate, as economists turned positive for the economic outlook.

Some forecast second-quarter economic growth will attain the potential growth level of around 5 percent, as the bullish stock market will help boost consumer sentiment and speed up economic recovery.

Behind the confidence is a recovery in the service sector output coupled with solid growth in exports and an improvement in consumer sentiment.

Still, there are concerns that the rate hike may block the economy from picking up further.

Last week, Finance-Economy Minister Han Duck-soo made his opposition public to the call rate lifting, saying an interest rate hike should be carried out for only valid reasons, but that, at this stage, the hike is not desirable.

Commenting on concerns that the BOK is in feud with the ministry over money policies, Governor Park said he consulted closely with Han to narrow differences, and that they agreed on crucial points in principle.

``Minister Han thinks the Korean economy is on the recovery track and is strong enough, and so I do,’’ the governor said.

jj@koreatimes.co.kr

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