Government pushes down interest rate

The annual interest rate on fixed-rate mortgages decreased to 6 percent range after hovering over 7 percent for days as banks hastily pushed down their mortgage rates, responding to a strong criticism from the financial authorities and the ruling party, which denounced that banks are "profiteering" from high interest rates. Korea's Ministry of Trade, Industry and Energy together with the Fair Trade Commission strengthened their on-site inspections on gas stations to check whether oil tax cuts have been properly reflected to consumer prices. They also began investigating into possible price collusion by oil refining companies. The Korean government is apparently taking matters into its own hands to suppress inflation hiking to record-high 6 percent range in 14 years and to push down soaring interest rates amid U.S. monetary tightening.

In the week ending June 26, Korea's Financial Supervisory Service Governor Lee Bok-hyun warned banks raking in large sums of profits via net interest rate spread, citing rising criticisms against lenders on interest profiteering. The warning immediately followed President Yoon Suk-yeol's request to the financial authorities and institutes to work on reducing tax burdens on consumers. Rep. Kwon Seong-dong of the ruling party also asked oil-refining companies to share the burden amid rising oil prices. Such series of remarks led banks to lower mortgage rates by 0.6 percentage points and drove oil companies to state that they will immediately reflect oil tax cuts into the oil price.

Although the government and the lawmakers may believe they have done their job right, consumers are barely feeling any changes. Lenders pushed down interest rates of some conspicuous financial products while keeping the rates that apply to most consumers. Oil companies can force only their directly-managed gas stations to lower the price and not the one set by non-affiliated stations. The former Moon Jae-in administration adopted an open price system for food in early this year such as fried chicken, pizza and coffee, which aimed to bring down surging eating-out costs but failed miserably. It’s an example that shows government efforts to influence market prices are hard to succeed.

The current Yoon administration, which won the election by vowing to rebuild the values of market economy and liberal democracy, is caught between a rock and a hard place. Strictly following market principles amid soaring inflation and interest rates would trigger criticism from the public that it is doing nothing. Arm-twisting lenders and companies, on the other hand, to stabilize the market just as its predecessors did, would mean self-abandoning its principles of boosting economy driven by the private sector. The Korean government should work hard to find a market-friendly solution to tackle inflation by promoting free competition in the business sector while focusing on restoring market mechanism and relaxing regulations.