[FORUM]We need a single financial czarIn any country, finance ministers have a great deal of power to manage national financial affairs. Sometimes they tiptoe along the line of abusing that power, and those actions usually involve encroachments on the turf of the nation's central bank.
A good example is from the United States in the late 1950s, when John W. Snyder, the secretary of the treasury, told business leaders that the administration would keep interest rates low and that such a policy had been agreed on with the Federal Reserve Board. The Fed had made no such agreement and immediately protested, triggering a serious fight between the two agencies. Congress stepped in, and the end result was legislation that increased the autonomy of the Federal Reserve.
Fast forwarding to May 5, 2002 in Korea, Jeon Yun-churl, the minister of finance and economy told listeners in a radio broadcast that the decision on whether or not to raise interest rates would be taken after first-quarter economic statistics were released. That strongly implied that rates would not be raised at the meeting of the Monetary Policy Committee, a Bank of Korea agency, scheduled for two days later. But on May 7 the committee indeed decided to raise the benchmark call rate by a quarter-point. The market was taken aback by the decision, and rumors said that the decision was intended, at least in part, to send a warning to Mr. Jeon to mind his manners and stay out of the central bank's business.
Disagreements beetween the two agencies is not desirable since clashing views of senior officials in charge of interest rates only creates confusion in financial markets.
It is not clear what effect the incident will have on relations between the Finance Ministry and the central bank, and whether the ministry, which has yet to voice a reaction to the bank's sudden decision, would take its own revenge. That uncertainty also troubles financial markets. Aside from the collision between the ministry and the bank, the abrupt interest rate hike raises other questions.
For example, the central bank revised its growth outlook for the year upward to 5.7 percent three weeks before the interest rate hike. Because the bank did not comment on its assumptions underlying that forecast, it is not clear whether it factored in the effects of an expected call rate hike or not.
A related point is that if the bank intended to cool demand and rein in inflationary pressures with an interest rate hike, it should have made clear what the objectives were. At present, consumption is robust but corporate investment is stagnant here. Investment is sensitive to interest rates, while consumption is not. So, experts wonder, does the central bank intend to discourage investment?
The monetary committee said that at the root of the interest rate hike is the concern about the increase of loans extended to households because of low interest rates. Household loans in Korea are usually taken out for long-term purposes and not to finance current consumption. But would a 0.25-percentage-point interest rate increase be effective in curbing household loans?
Finally and even more fundamentally, I wonder if the current bank rate policy, which was mainly implemented by adjusting the call rate, is effective.
In countries where financial markets have developed in a balanced way, such as the United States, the central bank's adjustments in short-term interest rates usually lead to changes in long-term rates; long-term rate changes have a substantial impact on the real economy.
Is that the case in Korea? In reality, no. The call rate is independent of other market interest rates and has little effect on those other rates. That is why the central bank governor asked commercial banks to raise deposit interest rates when he announced the call rate hike.
I draw three conclusions: First, the central bank must be the sole decision-maker when it comes to interest rate policy to eliminate market confusion. Second, the bank should put more effort into studies of the effects of bank rate policies on the economy. Finally, our financial markets must be developed so that the central bank will have other management tools available to complement interest rate policies.
The writer is the director of the JoongAng Ilbo Economic Research Institute.
by Ro Sung-tae