May 08, 1999
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| May 08, 1999 | atimes.com | |
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| The Koreas Recovering South Korea ends interest rate cuts By Judy Lee Bloomberg News Seoul- South Korea's central banksaid it will leave interest rates on hold, abandoning its 10-month run of cutting rates to jump-start growth, as theeconomic recovery gathers pace. The policy reversal follows a series of better-than-expected first quarter economic indicators showing the economyis on course to expand in 1999 after suffering its worstrecession in about five decades last year. ''The central bank will maintain the current level of callrates for the time being, but will closely watch the pace ofeconomic growth,'' the Bank of Korea said in a statement. Thatsuggests the central bank may raise interest rates if theeconomy shows signs of overheating. The prospect of unchanged or higher borrowing costs ifinterest rates rise is yet to rattle investors' confidence asrates remain at only half the level they were before thenation's financial crisis took hold in late 1997. The main kospi index surged as much as 2.79 percent to792.68 points, close to its two-year high, bringing its year-to-date gain to 35 percent. The yield on the benchmark three-yeargovernment bond fell 1.21 percent points to 5.87 percent,ending a week long gain to a six-week high of 6.82 percent inthe previous trading day. Earlier this week, the central bank said first-quartergrowth exceeded 4 percent, higher than its forecast. Thatcompares with a contraction of 5.8 percent in 1998. The country, which needed almost $60 billion from theInternational Monetary Fund in late 1997 to avoid defaulting onits debt, is recovering faster than other crisis-hit Asiancountries, such as Thailand and Indonesia. Overnight call rates, which topped 30 percent in theheight of the country's financial crisis in early 1998, droppedby 3 basis points today to 4.73 points after a 0.6 percentagepoint gain in the past week. A rise in the rate, which thecentral bank charges commercial banks for overnight loans,typically drives up bank lending rates. In April, MCT+, a major gauge of monthly average moneysupply, which includes currency in circulation, bank deposits,repurchase agreements, cover bills, certificates of deposit andtrust accounts at banks, expanded at 3.5 percent from a yearago. That's still a 'slow pace,'' even as it accelerated fromthe 3.2 percent increase the previous month, the central bank said. Granted, Korea's inflation was tame. Consumer prices roseat an annual pace of 0.7 percent in the first four months ofthis year. That's well below the government's target to keepinflation at 3 percent this year. The annual increase in M2, which excludes trust accountsand certificates of deposit, also accelerated to 34.5 percentlast month, from 33.6 percent in March. The central bank plans to increase money supply by as muchas 14 percent this year, expecting corporate demand for fundswill pick up in the second half in line with an anticipatedexpansion in the economy. The total amount of money supplied by the central bank tocommercial banks was unchanged at 21 trillion won at the end of April. | |||||||||
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