Floating capital hits record high on low interest rates

South Korea saw a record high level of capital invested in short-term financial instruments as consumers and investors have been reluctant to invest in long-term assets due to low market interest rates following recent key base rate cuts.

Short-term investments ― floating funds invested in repurchase agreements and money market funds with maturities of less than a year ― reached a record of 800.7 trillion won ($705 billion) at the end of January, according to the Bank of Korea and the Korea Financial Investment Association on Monday.

This means that people are parking their money in short-term investment accounts, or simply not spending it, due to a lack of financial products that offer higher interest rates in the long term, analysts said.

A dim economic outlook on the back of low consumer sentiment and rates are making investors reluctant to move their money to sectors such as real estate, stocks and insurance.

Keeping their funds in short-term accounts would be more profitable than bank deposits especially after the country’s interest rate entered the 1 percent range. Short-term instruments generally offer higher interest rates than bank deposits.

Last week, the central bank unexpectedly cut its key base rate to a record low of 1.75 percent in the face of looming deflation, despite concerns over household debt. It lowered the rate as it feared that growth and inflation would fall short of its initial expectations. The BOK had projected the economy to grow 3.4 percent this year.

The central bank has slashed the rate six times since July 2012 when the key rate stood at 3 percent.

Concerns in the market are rising as funds are not flowing into the real economy to boost private investment and consumption despite a series of rate cuts.

“Companies and consumers will not immediately invest or spend after the rate cuts,” said an analyst of Woori Finance Research Institute.

Analysts forecast that a growing number of people will shun depositing their money into bank accounts with interest rates of around 1 percent, adding that it would be difficult to boost capital flows without improving the sentiment toward the economy.

The private sector is also expected not to increase bond issues amid low investor sentiment.

“We do not expect companies to issue more bonds despite lower interest rates,” said Lim Jung-min, an analyst at NH Investment & Securities.

By Park Hyong-ki (hkp@heraldcorp.com)