[EDITORIALS]Re-evaluate monetary policy

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[EDITORIALS]Re-evaluate monetary policy

The U.S. Federal Reserve raised a key interest rate by a quarter of a percentage point. With the eighth increase since June, the interest rate has jumped to 3 percent from 1 percent. The U.S. government seemingly decided to relieve worries over inflation despite the temporary economic slowdown. Now the key interest rates of Korea and the United States differ by only 0.25 percentage points. If the Fed raises rates again, Korea’s interest rate could be lower than that of the United States.
With the increase in U.S. interest rates, worries over a flow of funds out of Korea have heightened. It is natural for money to move in accordance with a change in interest rates in an open economy. Foreign funds are highly likely to move out of Korean stock markets.
Park Seung, the governor of the Bank of Korea, said, “The degree of difference [between U.S. and Korean interest rates] and the degree of the flow of funds out of Korea is the problem.” Mr. Park made the remark considering its positive effect of slowing the appreciation of the Korean won.
But with the Fed’s decision to lift interest rates, Korea should re-examine its monetary policies. Despite the low interest rates, neither corporate investment nor domestic consumption has increased. There are also concerns over whether monetary policies aren’t working because Korea is in a so-called liquidity trap.
There also are side effects from low interest rates, such as a real estate bubble. But the monetary authority is not yet ready to raise interest rates because it is not sure whether the economy has hit bottom. It cannot rule out the possibility that an increase may cause a decline in domestic investment, employment and ultimately economic growth.
That’s why the Monetary Policy Committee’s meeting on May 12 is of keen interest. The committee has to make a difficult decision because it has to consider the economic recovery, inflation stabilization and preventing money from leaving the country. Fortunately, the aftermath of the credit card crisis seems to be under control. On the other hand, the domestic economy and the global economy have not headed in the same direction for the last two years.
This is the time for the monetary authority to make a discreet decision. The Finance Ministry and the political parties should not pressure the monetary authority in its interest rate decision, because it is a delicate moment that can have a disastrous result if the committee gives a wrong signal to the market.
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