(EDITORIAL from Korea Times on Oct. 21)

Policy dilemma: Market interest rates jump despite BOK's rate cut

It is usual to see market interest rates going down when the central bank cuts
its key rate. A rate cut allows commercial banks to lower deposit and lending
rates at the same time, while a rate hike does the opposite. The Bank of Korea
(BOK) slashed its key short-term policy rate by 0.25 percentage points to 5
percent on Oct. 9 in a bid to prevent the global financial crisis from taking a
toll on the local economy.
However, market interest rates are going up despite the BOK's action. Individual
borrowers are wondering what's happening in the money market. They express
growing concern that their interest payment burdens are becoming increasingly
higher amid the Wall Street meltdown and its spillover effects on economies
around the world. It is quite abnormal that the central bank's rate cut has the
undesired effect of raising interest rates on the local money market.
This shows that South Korea is bearing the brunt of the worldwide financial
firestorm. Even more serious is that the central bank's monetary policy cannot
work properly. The BOK raised its key rate by 0.25 percentage points on Aug. 7 to
5.25 percent in a move to tame soaring inflation amid higher oil prices and the
losing value of the local currency. However, it undid the hike after only two
months as the U.S. financial turbulence, the worst since the Great Depression,
spread to Europe, Asia and other parts of the world.
Scoffing at the rate cut, the interest rate for certificates of deposit (CDs)
with a 91-day maturity rose from 5.96 percent on Oct. 9 to 6.10 percent on Oct.
17, the highest since Jan. 19, 2001, when it stood at 6.16 percent. The rise
reflects the fact that banks have more difficulties in raising funds, hit by the
fallout of the U.S. subprime mortgage crisis. Fears about a possible growth in
banks' bad assets are only aggravating the problem.
Banks are suffering from a credit pinch not only in getting hard currency loans
from abroad but also in raising won-denominated funds at home. Thus, they are
passing their growing burden to borrowers by raising lending rates. Banks hiked
their rates for home-backed loans by up to 0.5 percentage points to as high as
8.5 percent in a week. In addition, they cannot lower their deposit rates on
fears that savings could move from banks to other financial companies or
securities firms that offer higher-yielding instruments.
The central bank is in a policy dilemma. On Monday, BOK Gov. Lee Seong-tae hinted
at a further rate cut to minimize the financial storm's fallout on the real
economy. But market watchers are not sure the additional cut will produce its
desired effect. In this situation, the BOK is under attack for taking belated
action, thus causing a property bubble and higher inflation.
During the National Assembly inspection of government ministries and agencies,
both ruling and opposition parties slammed the central bank for its failure to
take timely and appropriate monetary policy. We call on central bankers and
financial policymakers to go all-out to ensure the country will not fall victim
to another crisis reminiscent of the 1997-98 Asian financial turmoil. Banks are
also urged to change themselves to maintain their credibility and financial
health in order to avoid the landfall of the raging financial tsunami.
(END)