[EDITORIALS]Rate cut looks like wrong move

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[EDITORIALS]Rate cut looks like wrong move

The Bank of Korea will hold this year’s first monetary policy committee meeting Thursday to decide whether to maintain the benchmark call rate at its current level or not. In the market, talk of lower interest rates is already circulating. Since the government is concentrating its efforts to revive the economy on mobilizing finance, people speculate that the central bank should be compelled to conform to this atmosphere by lowering interest rates.
Remarks have come from the government that would seem to encourage the bank to lower rates. In a recent interview, Lee Hun-jai, the minister of finance and economy, said that “it is necessary to enhance ecnomic activity by employing a flexible interest rate policy when employment is low and the economy is below production capacity.” Though he used the expression “employing a flexible interest rate policy,” his remark could be taken by the bank as pressure to lower rates.
In November, the bank lowered the call rate 0.25 percentage points, from 3.25 percent, defying market expectations. It was apparent at the time that the bank had done so because it couldn’t resist the ministry’s pressure. As a result, money flowed into the bond market, and the market became even more unsettled. There was no pump-priming effect from the rate cut.
The situation has not changed much since. This is not because businesses do not have money or because interest rates are high. It is unlikely that consumption will rise if interest rates are lowered. In other words, this will not revive the economy.
If the call rate is lowered from its current level, there is the worrisome possibility that the market’s unease will only get worse. Even now, a lot of money floats in the market because of the low rates. And people who depend on interest for their income will feel anxious about their future as they see interest rates fall.
Under such circumstances, the government will only create problems if it lowers interest rates unreasonably to show its readiness to pursue economic revival. Advanced countries, including the United States, have been raising rates since the end of last year, and the trend will continue this year. Given this, it would be hard to argue that Korea should lower them. It is natural that the government should do its best to revive the economy, but monetary policy should be decided with prudence, after studying the benefits and the negative effects.
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