Bank Nudges the Economy

The Bank of Korea lowered the key interest rate Thursday by 25 basis points to 4.75 percent. The overnight call rate had been unchanged since it was cut from 5.25 percent in February. Speaking after a meeting of the central bank's Monetary Policy Committee, Governor Chon Chol-hwan said the continued business sluggishness made the move necessary. "The lag in capital investment and falling exports are adversely affecting industrial activity," he said.

Mr. Chon said the rate cut will redirect capital to the stock and fixed income markets.

"This will improve corporations' financing activities and investor confidence," he said.

Some analysts questioned the effectiveness of the central bank's move. Sogang University Professor Kim Pyong-joo said the impact will be limited, given the slump in the international business environment. "Monetary policy moves should be carried out together with expanding government spending and adjusting tax rates," he said.

Mr. Chon said that an anticipated cut in market rates, including bank rates, will lead investors to higher-yield financial products. Consequently, a narrowing of the spread between rates for different credit ratings will significantly improve businesses' financing capabilities, he said.

The money market closed down on Thursday. The three-year treasury bond yield ended the day at 5.98 percent, down 5 basis points from Wednesday. The average yield on the benchmark three-year corporate bonds was also down 0.05 percentage point, to 7.14 percent.

The loosening of reins on rates is not expected to lead to further price increases, Mr. Chon said, since there is little inflationary pressure currently present on the demand side. "We expect the level of price increase to be under 5 percent in the third quarter and to fall below 4 percent in the next quarter," he said. But it will be difficult to meet the central bank's target of 4 percent for the year, he said, due to price increases in the first half of the year and the upcoming increases in energy and public services prices.

by Cheong Chul-gun