Despite ample liquidity in low-interest environment, South Korea’s money velocity fell to a historic-low, suggesting people are reluctant to part with their money because of insecurity about the local economy and its prospects.

According to data released by the Bank of Korea on Tuesday, Korea’s velocity of money - a key barometer of economic activity - slipped to 0.69 percent at the end of September, the first dip below the 0.7 threshold since the 2008-2009 global financial crisis. Money velocity had been at 0.9 in 2006.

The velocity of money refers to the rate at which money is exchanged from one transaction to another in a given period. It tracks how many times a unit of currency flows through the economy and is used by various members of the economy, calculated by dividing the gross domestic product (GDP) by M2 money supply - cash and deposits plus near money such as money market mutual funds and savings.

Still, money supply increased 2.2 percent to 2,369 trillion won ($2.02 trillion) as of the end of the third quarter from 2,232 trillion won in the second quarter.

The all-time-low velocity of money indicates both individuals and enterprises were trying to hold onto cash as long as possible, fearful of their jobs and income because of little sign of pickup in the economy on top of general skepticism about the long-term outlook in the economy faced demographic and other structural problems. Velocity in money is estimated to have lost more grounds in the fourth quarter as consumer and business sentiment has been further dampened by the unprecedented political scandal involving the president and lapse in state leadership.

The money multiplier, a measure of the extent to which the creation of money in the banking system results in the growth in the money supply, also remained unchanged from the second quarter at the lowest of 17 in the third quarter. The idle money in the nation’s economy increased by 60 trillion won from last year to 978 trillion won, with demand deposits rising 9.3 percent on year as of the end of September.

By Chung Ui-hyun and Boo Jang-won

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]