[EDITORIALS]Hazards in monetary policyThe Bank of Korea's monetary policy committee raised its key interest rate Tuesday by a quarter point to 4.25 percent, the first hike in 19 months. We do not see any problem in the timing or size of the increase; in fact, the central bank had warned earlier of such an action. It was only a matter of time before the central bank acted.
Park Seung, the bank's governor, had warned financiers to expect a hike, and when the central bank upgraded Korea's economic growth forecast to 5.7 percent from 4 percent last month, he commented that the economy was showing signs of overheating. Also last month, total liquidity in the economy grew by 13 percent, higher than the bank's target, and household lending increased by 25 trillion won ($19.5 billion) for the first four months of this year. Given those signs of huge amounts of liquidity in the market, it is small wonder that the bank took preemptive action to keep the economy from overheating and to forestall the inflation that would inevitably have followed.
Although this is the first interest rate increase in a long time, the market did not initially react with dismay; indeed, local stock prices ended higher Wednesday. Commercial lenders are expected to raise their deposit and lending rates in the near future, but experts say that the increased interest burden on households and businesses will be modest, not even 1 trillion won in total. But the rate hike signals that low interest rates will not last forever.
Therefore, households should be more careful about the debt they carry and think twice about how much that debt will cost them.
Although the administration quietly tried to block the rate increase, the bank acted anyway. This presents special challenges to the monetary authorities in the near future. In particular, the central bank should pay attention to criticism that even the U.S. Federal Reserve has delayed a rate increase because of an uncertain recovery in the U.S. economy and that major international variables like oil price and the won-dollar exchange rate are unstable. The increase in the call rate has sent enough of a signal to the market, and the bank should be prudent in interest rate management. If the economy turns down again, the central bank will be held accountable.