Timing for exit strategies

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Timing for exit strategies

The Federal Reserve, which is the central bank of the United States, announced Thursday that it will raise the interest rate it charges banks for emergency loans to 0.75 percent from 0.5 percent. The shock on the market was minimal, as Federal Reserve chief Ben Bernanke had already hinted at a potential hike in the discount rate. It appears the move had a limited effect on Korean financial markets as well.

The Federal Reserve’s decision to increase the discount rate is not necessarily aimed at bringing about a rise in overall interest rates. Rather, it is an attempt to veer away from the string of emergency economic support measures the country adopted as it battled the global financial crisis. The move, therefore, can be viewed as the first phase of an exit strategy.

Many experts believe that the implementation of such strategies will officially begin when the U.S. Federal Reserve increases the deposit rate on excess reserves.

In that sense, last week’s increase of the discount rate should be interpreted as more of a prelude of exit strategies to come rather than the start of these plans. But just because the U.S. has begun to take baby steps toward implementing exit strategies doesn’t mean Korea should do so as well. For starters, the economy has yet to fully recover. Also, Korea could experience an unexpected backlash if it pushes ahead with such moves, as the world’s major economies have yet to go full-throttle with exit strategies.

It’s more important for the Korean government and the Bank of Korea to work on narrowing their differences on the issue. While the Korean government adheres to its position that it is too premature to implement exit strategies, Bank of Korea Governor Lee Seong-tae said at the National Assembly briefing last Thursday that he thinks the “time is imminent” for such moves.

This is a clear sign of a difference in opinions. And this can be pretty fatal to the economy in general, considering that the government and the central bank remain starkly divided over these types of key financial policies.

First and foremost, the Korean government and the Bank of Korea should work on bridging the gap between their views. After taking those steps, they should work together to devise their own specific exit strategies, taking into account those of other major economies and our economic situation at the time.
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