[EDITORIALS]A welcome rate hikeThe Monetary Policy Committee of the Bank of Korea has finally raised the call rate 0.25 percentage points. This is the first time that the central bank has raised the call rate in the past three years and five months. The change came after 11 months in which the bank held the rate at a record low. We have emphasized the necessity to raise the rate on many occasions. The decision came belatedly, but it was the right decision.
This interest rate increase will allow the economy to correct the flow of money distorted by the prolonged regime of low interest rates. Because the government insisted on keeping rates low with the intent of reviving the economy, money in the market tended to be volatile short-term funds that were moved around easily. The low rates provided a reason to send real estate prices skyrocketing and triggered worries about foreign capital flight as we forcibly froze rates despite the global trend of interest rate increases.
Since the capital market will be normalized with the rate increase, we must concentrate on directing the flow of money to productive sectors. Park Seung, the central bank governor, said that confidence in the economy’s recovery next year was the basis for the decision to raise the rate. But it is premature to predict economic recovery based on the improvement of some economic indices. Although exports grew and some consumer indices turned better, investment, the key to economic recovery, is still sluggish. To be sure of the economy’s recovery, we have to revive business’s will to invest and direct the overflowing money in the financial sector toward more investment. The rate increase is not the result of a recovery, but a measure to correct distortions in the capital market. Therefore, we have to pursue multi-faceted efforts to revive the economy apart from the rate increase.
One thing we must make clear is that we must have a discreet and skillful approach to monetary policy in the future. First of all, government officials must refrain from making too many comments about interest rate policy. It will only hurt the stability of monetary policy if officials comment publicly on interest rates, and it hurts the independence of the central bank. Personal comments by the central bank governor or monetary committee members bring confusion to the market and dampen the effects of interest rate policy, so they should be prudent.
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