“The era of low interest rates for 7 years is over.”
As the Bank of Korea took the ‘big step’ of raising the base rate by 0.5 percentage points at a time for the first time in history on the 13th, commercial banks quickly started raising the deposit rate. The reason why the banking sector responded so quickly is because of the constant ‘signals’ from the political and financial authorities. Earlier, when President Yoon Seok-yeol warned banks of ‘interest trading’, banks lowered interest rates on loan products all at once. Some criticize that it is inappropriate for the government to directly order a rate increase or cut as it can be seen as ‘government finance’.
There has been an ‘invisible nerve war’ over interest rate adjustments before. In particular, whenever there is a change of government, the government, which wants to stimulate the economy, and the Bank of Korea, which puts price control at the top of the list, clash, causing dissonance. At times, one side lay flat on one side, and at other times an all-out war was conducted to explore the ‘direction’ of monetary policy.
“Even a small amount of money can be accumulated and accumulated to create a huge industrial fund and expand investment” (in the discourse of the Pan-National Savings Movement in September 1965)
In an era when saving was a virtue and patriotism, the Park Chung-hee administration took measures to make the interest rate a reality, unprecedented in history, just one year after the establishment of the ‘Saving Day’ in 1965. The deposit interest rate, which had reached 15% per annum at the time, almost doubled at once. The funds accumulated in the bank were used by companies that had difficulty in raising equity capital at low interest rates and used as funds for exports and industrialization.
The Chun Doo-hwan government also encouraged private savings to flow into the manufacturing sector. In October 1985, former President Jeon Jeon said in a speech on the administration of the 1986 budget bill, “It is a situation in which we cannot but continue to depend on external debt for financial resources necessary for economic development. We need to raise it to more than %,” he emphasized. This was possible because interest rates were moved under strict government control at a time when government-led economic development was in full swing.
Former President Kim Young-sam ordered a rate cut to stimulate the economy at the Economic Ministers’ Meeting in April 1993, right after taking office. He also implemented ‘interest rate liberalization’, which eliminated all interest rate tables except deposits under six months in order to join the Organization for Economic Cooperation and Development (OECD). For the first time since their establishment, banks have entered a competitive system by offering different interest rates on loans and deposits. Four years later, when the foreign exchange crisis struck, in return for a bailout from the International Monetary Fund (IMF), the murderous high interest rates of 20-30% a year were maintained until March 1998.
As the economic recession deepened and the surplus went bankrupt due to the aftermath, former President Kim Dae-jung said in a conversation with the public in May, “I was also in the shipping business when I was young and made money and was the president of a local newspaper, so I am well aware of the difficulties of small businesses.” Small and medium-sized enterprises (SMEs) are going bankrupt, and we will lower the 30% call rate and the interest rate on 3-year corporate bonds to 20% or less.” The interest rate, which soared to 30% per annum at the beginning of his inauguration due to Kim’s remarks, fell to the 4% level a year later.
In 2004, the Roh Moo-hyun administration, surprised by the soaring real estate prices, raised interest rates. The base interest rate, which had reached 3.25% per annum in November of that year, was raised by 0.25% points eight times until August 2008 (5.25% per annum) during the early stages of the Lee Myung-bak administration. In 2008, when the global financial crisis broke out, central banks around the world began to competitively lower their benchmark interest rates. The base interest rate, which was 3.25% per annum in June 2011, was again cut eight times by 0.25% points, down to 1.25% per annum in June 2016. Under the Moon Jae-in administration, the interest rate was cut again in November 2018, and in May 2020, it dropped to a record low of 0.5% per annum.
The Bank of Korea was swayed by power… Every time a new government is inaugurated, a ‘war of nerves’
Since its establishment in 1950, the Bank of Korea, as a monetary policy maker, has long served as the government’s bridesmaid. During the military regime, the authority was greatly reduced, and the Minister of Finance (currently the Ministry of Strategy and Finance) took over as the head of the Monetary Policy Committee at the time, and was called ‘Namdaemun Branch’. As the president has the power to appoint the governor, he could not ignore the influence of the government. In 1997, when the Bank of Korea Act was amended, it took its first steps as an independent institution, and at this time, the Bank of Korea Governor also served as the Chairman of the Bank of Korea.
It was implemented with the intention of preventing the BOK from being swayed by the government’s short-term stimulus measures, but the war with the government continued. Former President Roh Moo-hyun, who visited Paris in December 2004, said at a breakfast meeting hosted by the French Federation of Businessmen, “The Korean government will respond to the economic slowdown by operating an active and flexible fiscal and monetary policy.” Two days before the MPC meeting, he urged the interest rate to be cut further than it is now.
Former President Lee Myung-bak, who made the ‘747 pledge’, also called for a blatant rate cut. When the 2008 financial crisis broke out, in October of that year, in a speech on the budget for next year, he ordered a preemptive rate cut, saying, “When putting out the fire, pour enough water to put it out in a short time.” However, Lee Seong-tae, who was a “hawk” at the time, had a head-on collision with the Blue House by freezing the base rate, contrary to expectations.
Ex-President Lee increased the pressure even further by remarking that “a policy that can lower interest rates further” ahead of the meeting of the Monetary Policy Committee in January 2009. Conflicts over the ‘right to speak out’ have reached a climax. The right to speak out is the right of government officials (such as the Ministry of Strategy and Finance or the Financial Services Commission) to attend meetings of the Monetary Policy Committee and speak.
The noise was greatest when the new government was inaugurated. Immediately after taking office, the Park Geun-hye administration also put pressure on the BOK several times, saying, “It would be good if the BOK lowered the interest rate.” With these remarks, then BOK President Kim Jung-soo suddenly failed to attend the economic and financial inspection meeting (west annex meeting) held for the first time under the Park administration in March 2013, making it seem as if he was building a confrontational angle with the government. At a New Year’s press conference in January 2005, former President Park said, “We will respond in a timely manner to interest rate cuts.”
It is not Park’s remarks, but Choi Kyung-hwan, Deputy Prime Minister of Economy, who was called his reconsideration, ‘pretend to pretend,’ is still being talked about. Former Deputy Prime Minister Choi, while attending a meeting of finance ministers and central bank governors of the G20 (G20) in September 2014, met with then BOK governor Lee Ju-yeol, and said, “I didn’t even talk about interest rates, but ‘if you pretend, you pretend’.” It was interpreted to mean that the BOK would take care of lowering interest rates even if they did not say it.
The Moon Jae-in government has become controversial because it pressured the BOK to control the loan interest rate to set house prices. Former President Moon Jae-in, through his economic adviser in August 2017, said, “The fact that the base rate is 1.25% per annum is actually a bit problematic.” After that, Prime Minister Lee Nak-yeon said, “It’s time to seriously consider raising the base rate” in a question to the government in September 2018, and then Minister of Land, Infrastructure and Transport Kim Hyun-mi also said, “Excess liquidity due to low interest rates is the biggest cause of the surge in house prices.” did.
Reporter Seo Hee-yeon cuba@hankyung.com
