[EDITORIALS]Rethink low interest rates

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[EDITORIALS]Rethink low interest rates

The Federal Open Market Committee of the Federal Reserve Board of the United States has raised their key interest rate to 3.25 percent, a 0.25 percent increase, as had been anticipated. Since last June, it is the ninth such increase the board has taken in a year. In contrast, the Bank of Korea has stuck to the same call rate of 3.25 percent for the past seven months. As a result, the U.S. prime rate and South Korea’s call rate have become exactly the same.
In the meantime, the rate on Korea’s benchmark government bonds has risen higher than that of U.S. treasury bonds, and the gap between them will grow bigger if the U.S. prime rate is raised further. Domestically, the gap between the central bank’s call rate and market-based interest rate grows wider as the rate of national bonds rises. When the domestic rates drop lower than those of the international market, the gap between the central bank’s call rate and that of the market widens simultaneously. The monetary policy of the central bank runs against not only the international trend, but also the flow of the domestic market. This is evidence that the bank is sticking to the low-rate policy in futile.
The recent low interest policy has had no effect on reviving the economy. Rather, it worked as a factor that increased the liquidity of money on the market and pressured real estate prices to rise. If the difference of the rates of the United States and South Korea grow, we can’t exclude the possibility of a departure of foreign capital from Korea and even the flight of domestic capital overseas. We have already emphasized the necessity to send a warning to the market by raising the interest rate nominally as a preventive measure to cope with any burst of the real estate bubble.
But the government still clings to the low-rate policy under the pretext of boosting the economy. Han Duck-soo, deputy prime minister for economy, said on June 30, “It is not desirable to raise interest rates because of the real estate problem.” Again, he said yesterday, “There will be no rate increase, and the governor of the Bank of Korea has also agreed with my opinion.” Such remarks not only shun the changes in the market situation and the shortcomings of the low interest rate policy, but also damage the independence of the central bank.
Since it lost the timing of the rate cut at the end of last year due to pressure from the government, the central bank is still failing to make its own voice heard. Before it’s too late, the central bank must reconsider its low-rate policy.
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