BOK faces dilemma keeping low rate

The Bank of Korea is widely expected to leave its overnight call rate at a record low of 3.25 percent today to prop up the still-fragile economic rebound, analysts say.

To keep the interest rate at the current record low level, however, the central bank will have to face the daunting task of taming property prices and spurring economic recovery in the coming months, they say.

Both economic policymakers and economists share the view that domestic demand is not recovering fast enough to negate slowing overseas sales.

Finance Minister Han Duck-soo said Korea may miss its 5 percent economic growth target this year. The International Monetary Fund also reiterated its forecast for the Korean economy to expand at a 4 percent pace this year.

<**1>To accommodate the fiscal policy aimed at spurring spending and investment, economic policymakers have called on the central bank to keep the rate at the current record low.

But home prices that have risen in many parts of the country in recent months should worry government officials, calling into question the effectiveness of the administration`s campaign to curb price gains.

Low interest rates have prompted many investors to turn to the property markets that guaranteed hefty returns in the past away from banks and stock markets.

Keeping housing prices stable is one of the Roh Moo-hyun administration`s top priorities. In recent months, the focus of the housing policy has been put on containing sharp rises in real estate prices and preventing speculation rather than on reviving the troubled construction sector, closely linked with the property market.

Speaking a news conference after a monthly monetary policy meeting last month, Park Seung, governor of the central bank, said "a rise in real estate prices" is a grave concern in deciding future monetary policy. He said the central bank would closely watch the movement of property prices.

He also said monetary policy measures were not necessary to calm the market. "Microeconomic policies such as taxation and regulations should help the government stabilize the property market for now," said Park.

But a further housing price increase, coupled with a delayed economic rebound, could prompt the central bank to increase the rate later this year, analysts said.

The latest data show that apartment prices in Seoul rose 2.65 percent in the first quarter of 2005, compared with a 1.59 percent gain during the same period last year, signaling a pickup for the long-depressed real estate market.

Prices of apartments due for reconstruction in Seoul have seen a particularly high increase of nearly 16 percent this year, according to Doctor Apartment, an online property agency.

With the narrowed rate gap between the United States and Korea, the central bank is unlikely to cut its call rate anytime soon, analysts said.

The U.S. Federal Reserve Board is expected to raise its rate by 0.25 percentage point on June 29-30. As the spread between the U.S. Fed rate and the Korean call rate disappear, the string of Fed rate increases would prompt international funds to flow to the United States.

"The BOK is unlikely to cut its target rate merely to stabilize the foreign exchange market and stock market," said Lee Sung-won, an economist at Goodmorning Shinhan Securities Co.

Investors and analysts are keen to hear Park`s additional comments on the property market and the growth outlook today. His blunt and what critics describe as careless and inappropriate remarks as central bank head have sent confusing signals to the market participants in recent months.

Park`s misinterpreted remarks on foreign currency policy during an interview with the Financial Times earlier last month roiled currency markets. It was the second communication mishap by the central bank this year.

In February, currency markets around the world were alarmed at a report that the BOK planned to diversify its more than $200 billion foreign reserves, the fourth-largest in the world.

Park is scheduled to report to the National Assembly on June 13 on various issues including management of the foreign reserves.

(jungmin@heraldm.com)









By Kim Jung-min