BOK Governor calls for government’s role in reducing interest rate spread

Bank of Korea Governor Rhee Chang-yong [Photo provided by Bank of Korea]

Bank of Korea (BOK) Governor Rhee Chang-yong on Thursday called on the South Korean government to advise local lenders to reduce their interest rate spread to normalize market rates.

“I believe that it is a matter of course for the government to advise or ask (lenders) to reduce the interest rate spread,” Rhee told reporters in a luncheon in Washington DC, U.S., on Thursday, where he attended the two-day G20 Finance Ministers and Central Bank Governors Meeting.

“It is about sharing the burden and it is a justified role of the high-profitable banks. It is also about normalizing the interest rates that have gone up sharply after the Legoland Korea default crisis,” Rhee said.

An interest rate spread is the difference between the interest rate a bank pays to its depositors and the interest rate it receives from loans. Korean lenders have been criticized for their high spread that pressures borrowers.

Rhee also talked about inflation, saying that he expects inflation to be at 3 percent level by the end of this year under current circumstances.

“There is a high possibility that inflation will drop to the 3 percent range in the second quarter but it is uncertain whether it will go down to that range before December this year as we need to monitor the flow of oil prices and U.S. monetary policy,” Rhee said.

The BOK Governor noted that the market sees the benchmark interest rate to be lowered before the end of this year but we gave a warning during the last monetary policy board meeting that “that isn’t the case.”

“It is uncertain whether inflation will go down to the 3 percent level in the second half of this year,” Rhee said. “The market should not expect a rate cut as it will need stronger proof that inflation will edge down,” he added.

Rhee told reporters that central bank governors of other countries like Canada and Australia are interested in when the BOK will cut its rate as it froze the benchmark rate for two straight months.

“Central bank governors across the world are waiting to see how long the interest rate hike will continue to put a break on inflation while the market is waiting for a cut,” he said.

When it comes to the economy front, Rhee said that the Korean economy is expected to “start weak and end strong” once the price of chips rebound in the second half of this year.