The Central Bank and the Base Rate (The big step and baby step)

 

The Central Bank and the Base Rate

Let's look at the central bank and the base rate, and also look at the big step and baby step about the base rate.

There are central banks and commercial banks. Let's briefly review the concepts of central and commercial banks. A central bank is a bank that issues money, simply put, a bank that prints money. A typical example is the Bank of Korea in Korea.

Commercial banks are banks that conduct deposits and loans. In Korea, for example, there are several commercial banks such as Woori Bank, Shinhan Bank, Kookmin Bank, and Hana Bank.

The central bank's representative policies are monetary policy and interest rate policy. First, looking at monetary policy, the central bank provides money through the issuance of money. The central bank regulates the money supply by issuing money.

Looking at the interest rate policy, the Monetary Policy Committee determines the base rate based on Korea. The Monetary Policy Committee is abbreviated as 'Keum Tong Wi' in Korea. The Monetary Policy Committee decides to raise, lower, or freeze the base rate.

I mentioned the base rate earlier, but let's take a look at the base rate. The base rate is generated in RP transactions between the central bank and commercial banks. Commercial banks conduct deposits and loans to the private sector. This is where deposit and loan interest rates arise.

Here, interest rate refers to the rate of interest accruing on deposits or loans. Money has time value, so lending money accrues interest. The base rate refers to the interest rate that is the standard for RP transactions between the central bank and commercial banks. Here, RP stands for repurchase agreements.

Looking at the base rate hike, the base rate hike affects both the loan rate hike and the deposit rate hike. In other words, an increase in the base rate can have an effect on the increase in loan and deposit rates. In general, it is expected that inflation will stabilize and the household debt interest burden will increase. There are various variables in the real economy such as stocks and real estate, so it is difficult to predict only by raising the base rate.

Looking at the base rate cut, the base rate cut can affect both the loan rate cut and the deposit rate cut. In other words, a cut in the base rate can have an effect on lowering loan and deposit rates. Generally, it is expected that inflation will rise and household debt interest burden will ease. There are various variables in the real economy, such as stocks and real estate, so it is difficult to predict only by lowering the base rate.

Let's take a look at the big step and baby step of the base interest rate fluctuation range. The existing Monetary Policy Committee of the Bank of Korea has adhered to the Baby Step. The Monetary Policy Committee has kept the base rate fluctuation range of 0.25 percentage points by Baby Step.

However, the Bank of Korea mentioned the possibility of a big step by looking at the flow of the global economic market. Due to the global inflation and the US Fed's sharp rise in the base interest rate, the Monetary Policy Committee mentioned that could raise the base interest rate by 0.5 percentage points in a big step.

The Republic of Korea is at a crossroads between a big step and a baby step in raising the base rate. Optimism and prudence about Big Step are at odds. 

There are central banks and commercial banks. The central bank's representative policies are monetary policy and interest rate policy. It is necessary to look at the base rate and examine the effect of raising or lowering the base rate. There are big steps and baby steps in the base rate change, and it is worth paying attention to the Monetary Policy Committee's decision on big steps and baby steps.