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Fri, Nov 24, 2006 - Page 10 News List

Feature: South Korea central bank raises reserve ratio, tightens credit


South Korea's central bank yesterday ordered banks to raise reserves for the first time in almost 17 years in a bid to curb soaring housing prices.

The Bank of Korea said its monetary policy committee increased the mandatory reserve ratio on demand deposits from the current five to seven percent, effective from yesterday.

The decision, the first such rise since February 1990, is expected to squeeze liquidity at banks and reduce funds available for mortgage loans.

"Despite the key interest rate increasing five times since October last year, money supply growth -- led by the recent surge in household debt -- has risen sharply," the bank said in a statement.

It blamed excessive liquidity partly on "a jump in demand for loans amid expectations for housing prices to rise."

The bank said earlier that mortgage loans stood at 209.7 trillion won (US$222.8 billion) at the end of last month, up 2.7 trillion won from September.

Household debt rose 23.2 trillion won during the first half of this year, the biggest half-year gain since 2003.

Central bank governor Lee Seong-tae told reporters the move was related to real estate.

"But liquidity is not necessarily linked only to real estate. It is ... about maintaining liquidity at an appropriate level," he said.

The government last week announced another package of measures aimed at curbing soaring home prices, focusing on supplying more apartments and restricting mortgage loans.

The package calls for the construction of 1.64 million new apartments nationwide in the next four years, an increase of more than eight percent on the original target.

It also calls on banks to lend no more than 40 percent of what is deemed to be the fair market value of new apartments, in an attempt to stop speculation.

A newspaper survey last month showed that apartment prices in Seoul and adjacent areas have climbed 55 percent on average since early 2003.

"Housing prices have gone crazy," the Chosun newspaper complained last week.

The newspaper said a typical 102m2 middle-class apartment in fashionable southern Seoul cost 750 million won, up from 650 million won in October.

Some analysts warn of a sudden collapse of housing prices, triggering a financial crisis.

Commercial banks expressed disappointment at the move.

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