S. Korea required to normalize 'super low' rates: KDI report

SEOUL, July 21 (Yonhap) -- South Korea will have to bring its current "super low"
interest rate back to normal but such a move will have to be done "steadily" to
minimize market impact, a state-run think tank said Tuesday.
The policy recommendation came after the nation's central bank recently froze its
key interest rate at a record low of 2 percent for the fifth straight month after
reducing a combined 3.25 percentage points since October to prop up the slumping
economy.
"There are no different views that we need to normalize the nation's monetary
policy by closely monitoring economic conditions," the Korea Development
Institute said in a report. "The issue is when and how fast."
Hit-hard by a global economic recession, the Seoul government and the central
bank have been scrambling to boost the slumping economy by unveiling large-scale
fiscal spending plans and aggressively cutting the key interest rate.
Amid growing signs of economic recovery, however, debate is heating up over when
the authorities should begin to tighten fiscal and monetary policy.
The KDI worried that the low rates would have a "destructive" impact on the local
economy unless efforts are made to normalize the monetary policy directions at
the right time.
It cited as the reason for the concern a housing bubble in the U.S. years ago
caused by a failure to tighten its interest rates even after the economy bounced
back.
"Though rate reductions had been sought aggressively in response to a recent
global economic crisis, it will be desirable that the normalization process
should be carried out steadily," the think tank said.
"In order to normalize the super low interest rate without shocks, it will take
considerable period of time and this means we have to start the process as
quickly as possible," it added.
Touching on the ballooning fiscal deficit due to a series of expansionary policy,
the KDI called for the government to make efforts to streamline the nation's
expenditure structure and to expand the tax revenue base.
kokobj@yna.co.kr
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