Lowering Interest Rate
Hyundai Research Institute's senior researcher Kim Chun-koo said on August 31 that the optimum base rate of Korea based on the Taylor Rule is 1.76 percent for the second quarter of this year, which is 0.49 percentage points lower than the current rate.
“The official rate was close to the optimum rate until the early 2000s, but the former has been higher than the latter since the mid-2000s because of the increase in housing prices and household liabilities,” he commented in his report. He added, “Although the optimum rate went up significantly due to high inflation pressure after the global financial crisis in 2008, the low inflation and increasing GDP gap as of late have lowered the level of the optimum interest rate again.”
According to the report, Korea’s monetary conditions index (MCI) is around 6.2 at present, higher than in the United States, Europe, or Japan. The higher the MCI, the more constrictive the monetary policy is.
“Although the Taylor Rule is no absolute standard for base rate determination, the difference between the two rates implies that there is room for additional cuts in the base rate,” he explained.