The right rate

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The right rate

The monetary committee of the Bank of Korea has raised the key interest rate by a quarter of a percentage point to 5.25 percent.

This is the first time since August last year that the bank has raised the benchmark rate. Between stabilizing consumer prices and pursuing growth, the BOK chose the latter.

We believe this decision will be a burden in the near future, but it is the right decision to make from a long-term perspective.

When economic growth slows, consumption decreases and employment issues worsen. It isn’t easy to choose stability because a rise in the interest rate makes life tougher for companies and households and holds back growth.

This is why the BOK has hesitated over the past several months before it announced its decision.

However, as consumer prices surged to nearly a 10-year record high recently, the worry intensified that our economy is entering a period of stagflation in which prices are high but growth is slow.

Under these circumstances, it is natural to choose stability of consumer prices over growth. If we fail to control consumer prices, Korea will be beset with chaos.

Considering these factors, the government has decided to prioritize stability in its economy policy

We think the BOK should have raised the interest rate earlier. The central bank has missed the right moment because it was excessively worried about an economic downturn.

The past several months were a better time to raise the interest rate because the price of oil and raw materials went up dramatically, and there was anticipation of inflation.

Although belated, it is nonetheless good that the BOK showed the strength of will to get consumer prices under control.

It is more important from now on. A measure to raise the interest rate is like a double-edged sword. It stabilizes consumer prices but on the other hand, it increases the financial pressure on small- and mid-sized companies and working-class people.

An increase in the rate can also put mortgages at risk that can lead to a financial crisis. Thus, deciding an interest rate policy requires close observation of the market.

A good interest rate policy should calm worries over high consumer prices and prevent insecurity in the financial sector at the same time.

Close consultation and adjustment of opinions between the government and the central bank are also absolutely necessary.

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