Seoul, Jan 19: South Korea's top economic planners on Wednesday said long-term interest rates were too high and that cheaper funds were needed to ensure stable economic growth. The finance minister and the central bank governor said the three-year corporate bond yield - the benchmark long-term interest rate - was unappropriately high. The comments buoyed the domestic bond market and fuelled speculation that authorities would soon announce steps to increase demand for bonds and drive down yields."Generally speaking, although there are some destabilising factors seen for the early part of the year, I expect market interest rates to begin stabilising from the middle of the year," Bank of Korea governor Chon Chol-hwan said.
Speaking at a business breakfast hosted by the Korea Chamber of Commerce and Industry, Chon said the gap between the overnight call rate and the corporate bond yield was too large.
"The current gap represents two to three (percentage points of) risk premiums and inflation expectations," Chon said.
"I think the gap can be narrowed by about two (percentage points) once the market gains stability."The corporate bond yield fell one basis point to 10.41 per cent by midday while the overnight interbank call rate, the short-term benchmark, was up six basis points at 4.71%.
Finance Minister Lee Hun-jai, who took the post last week, said separately on Wednesday that local companies would be unable to withstand long-term interest rates of over 10 per cent and that the rates must be stabilised below 10 per cent.
"I think maintaining long-term interest rates below 10 per cent is a key policy in aiming to stabilise the economy," said Lee, who had led the country's Financial and corporate restructuring over the past two years as head of the Financial regulator.
Bond traders said there was speculation the government might soon implement a plan to exempt foreign investors from taxes on capital gains and interest earned on domestic government bonds.
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