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| Bank of Korea Governor Lee Ju-yeol |
Bank of Korea (BOK) Governor Lee Ju-yeol is expected to have a difficult time with lawmakers over the central bank's "wait-and-see" approach on the nation's policy rate during the upcoming National Assembly audit Monday.
The central bank's Monetary Policy Board decided last Thursday to hold its policy rate untouched for October on worsening economic data and low inflation pressure. The BOK has frozen the rate at 1.5 percent for the 11th straight month despite the government and ruling party's continuous pressure for the rate hike.
Criticism has been mounting on the BOK's tardy approach on the key rate, and lawmakers of the ruling Democratic Party of Korea (DPK) said they will bring Lee to account for the central bank's incapacity to come up with the rate hike during the audit.
Rep. Hong Young-pyo of the ruling DPK said the central bank's overly cautious approach to the rate hike induced too much liquidity creating the housing bubble in the metropolitan area.
"The BOK has kept interest rates too low for too long. Korea's idle funds are now estimated at 1,170 trillion won ($1.03 trillion), up about 100 trillion won from a year ago," Hong said before the BOK Monetary Policy Board meeting. "It created a bubble in the housing market."
Hong's remarks follow a chorus by high-ranking government officials, including Prime Minister Lee Nak-yon and Land Minister Kim Hyun-mee, for a rate increase as a way to cool down the overheated real estate market.
Despite the government and ruling party's strong pressure, the BOK decided to freeze the rate last week because of the nation's disappointing economic growth rate and ever-worsening job market.
Gov. Lee has also maintained his position that the central bank should make its monetary policy decisions without political interference.
"It is inappropriate to assess the policy rate in accordance with the nation's housing prices," Lee said after the BOK's Monetary Policy Board meeting on Oct. 18.
"Soaring home prices have nothing to do with the nation's economic status. It is rather related to the government's recent housing development policy."
Experts said the BOK is likely to raise the rate next month, noting two members of the seven-member board voted against the decision to freeze the rate.
"I believe Korea can sustain up to a 1.00 percentage point gap between the U.S. and Korea's policy rate," said Korea Institute of Finance President Sohn Sang-ho. The rate gap between the two countries is currently at 0.75 percentage point with 1.5 percent in Korea while the U.S. rate range is at 2 to 2.25 percent.
"The BOK may raise the rate before the gap reaches 1.00 percentage point by the end of this year, but like Lee said, the key rate is tangential to the nation's soaring home prices. The commercial rate has already reflected the U.S. interest rate hike and has been applied to the lenders' loan market."
