Low key rate boosts floating funds

Record-low interest rates have increased the country’s short-term floating funds to an all-time high of 900 trillion won ($851.4 billion), igniting concerns about poor money circulation.

According to Bank of Korea and Korea Financial Investment Association, the total short-term floating funds stood at 884.4 trillion won as of late June. They grew 90 trillion won in first half of this year, revealing that long-term investments are fast losing steam in the money market.

The short-term floating funds, or “parked money,” refers to the financial derivatives that invest in short duration investment vehicles with high flexibility and low risk. When the interest rates are low, more investors seek short-term investment funds for liquidity until more profitable long-term derivatives are available.

However, at the macro level, this can prolong the economic slowdown by blocking healthy circulation of funds. 

(123RF)

As of late June, the country’s short-term floating funds include 69 trillion won in cash, 164.6 trillion won in demand deposits and 414.3 trillion won in cash management account deposits, the central bank data revealed. The parked funds also include 71.7 trillion won in savings deposits with maturity of less than six months and 18.7 trillion won in certificates of deposit.

Financial experts estimate that this amount will continue to grow fast, as low interest tide has narrowed the profit gap between long- and short-term investments.

The BOK has bound the key rate at an all-time low of 1.5 percent since June, the latest of its four rate cuts since last August, citing sluggish domestic consumption and falling exports.

By Chung Joo-won (joowonc@heraldcorp.com)