[Editorial] The BOK’s timid monetary policy

Posted on : 2011-02-12 13:41 KST Modified on : 2011-02-12 13:41 KST

Yesterday, the Bank of Korea’s (BOK) Monetary Policy Committee froze the key interest rate at 2.75 percent. This indecisive approach followed hints last month at the possibility of a hike. It is questionable whether such measures are capable of reining in rapidly rising consumer prices. The house has started burning, yet they continue to stress the need not to rush into anything.
As BOK Governor Kim Choong-soo said, the current situation is no different than it was in January. The export and domestic demand economies are showing a trend of recovery, and international crude oil prices and other import costs are rising quickly. Upward pressure on prices is growing on both the supply and demand sides. More importantly, there is an expectation of inflation. Once that expectation goes beyond a certain level, the rise in prices will gather steam regardless of actual supply or demand.
Under these circumstances, the first thing the BOK should be doing is showing a strong determination to keep prices stable. It is not a question of raising the interest rate in January or raising it for two months straight. What enabled us to get the domestic economy under control early on after the financial crisis was a lowering of interest rates that was without parallel in its promptness and power. The current situation is no different. It is time to show a powerful determination toward price stability by effecting an interest rate hike more quickly than ever. Under the current circumstances, it will be difficult to reduce upward pressure on prices even with such a move.
Kim has said, “We are in a process toward interest rate normalization,” and, “The BOK has set more or less appropriate speed and scale raising [the key interest rate] three times over a ten-month period.”
It is impossible to agree with this. Last year, the BOK maintained the interest rate at 2.5 percent per annum in a situation where the economic growth rate was a full 6.1 percent in line with the Lee Myung-bak administration’s growth-first policy keynote. Last month, it raised the rate to 2.75 percent, but this falls well short of the 4 percent equilibrium interest rate suggested by the International Monetary Fund.
Rather than effecting appropriate interest rate hikes, the BOK has merely looked to others for signals and followed along by going through the motions of raising the rate. When it comes to the interest rate, preemptive measures are crucial, as it takes about six months for them to be reflected in the real economy. This is something that BOK itself has emphasized. In that sense, the key interest rate should have been raised to over 3 percent last year.
The current situation is the same. If their plan is to raise the rate next month, the correct approach would be to raise it this time as well. That extent will not cause the domestic economy to stagger. We would like to ask the BOK whether this was the signal they received about raising the rate two months in a row. Kim said the BOK would proceed “neither too fast nor too slow.” We hope this is not intended as a way of concealing indecisiveness in monetary policy.

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