By Kim Jae-kyoung
Staff Reporter

Korea will completely liberalize the interest rate next February when the remaining control on demand deposit rates is fully scrapped.

It took 13 years for Korea to fully liberalize the interest rate since deregulation started in 1991.

The Bank of Korea (BOK) made the decision to remove all remaining interest rate control on Feb. 2 in a monetary policy committee meeting on Wednesday at its head office, downtown Seoul.

Currently, interest rates for all bank deposit products are liberalized, with the exception of demand deposits, including ordinary deposits and temporary deposits.

Demand deposit rates are capped at 1 percent, which means banks are not allowed to provide over 1 percent interest per annum to depositors. Demand deposits accounted for 9.5 percent of outstanding bank deposits in June and the interest level of these deposits average less than 0.1 percent.

``Since the deposit base at banks is strong and the financial market remains stable with a low interest rate trend, liberalization of demand deposit rates will not generate negative effects,’’ BOK economist Huh Jin-o said.

``This marks the completion of our decade–long interest liberalization program,’’ he added.

The government wrapped up three-step interest-free measures from November 1991 to November 1995 in accordance with a four-step interest liberalization plan announced in August 1991. In July 1997, the government liberalized the interest rates for savings deposits that can be withdrawn any time.

``The full liberalization of interest rates will give more leeway for the central bank to conduct monetary policy flexibly,’’ Huh said. ``Also, consumers will have a wider choice of financial products.’’

A number of economists and bankers said that the liberalization is unlikely to trigger interest rate competition among banks to attract more customers.

``The central bank’s measure this time is not likely to have banks rush to raise interest rates because demand deposit rates are already very low,’’ Hana Bank official Lee Sang-hoon said.

``But chances are that if some cash-strapped banks raise deposit rates drastically to secure funds, it could result in cutthroat competition, eroding profitability of banks,’’ he added.

kjk@koreatimes.co.kr