Get on the same page, BOKThe Bank of Korea’s monetary board last week kept the benchmark interest rate unchanged.
The move was widely expected because a second consecutive rate hike could be risky against a dim global outlook due to a slowdown in the American and Chinese economies.
But the board and Governor Kim Choong-soo’s statements strongly suggested additional rate increases down the road.
The central bank in its statement said that future monetary policy will be directed to sustain economic growth and keep consumer prices stable.
After the rate decision, Kim said at a press conference that monetary policy makers will have to focus more on tending to prices rather than supporting growth. He also added that the current 2.25-percent rate was an “inappropriate level,” strongly implying that the bank would send the interest rates higher.
But the central bank’s view on the economy and monetary policy runs against the general opinion of the market and government. Finance Minister Yoon Jeung-hyun recently raised concerns about an economic slowdown, warning that the Korean economy is facing abnormal uncertainties.
Market experts also advise against a hasty exit strategy by the government, which would mean a tighter monetary policy, citing unrest in the global economy and various downturns in leading economic indicators.
In other words, the clear discrepancy in the economic outlook of the central bank and that of big market players could add to market uncertainties.
The Bank of Korea is justified in trying to stem increases in consumer prices and in pursuing sovereign decisions over monetary policy. But the central bank should keep in tune with the government and market in assessing the economy and its outlook.
If it has different views on the current pace of the economy than the government or the market, its monetary policies may confuse and eventually unsettle the market. A two-track policy, both expanding and tightening at the same time, cannot exist in the end.
If financial and monetary authorities send different signals to the market, it will be the investors and consumers who will pay a heavy price.
Despite the importance of maintaining its independence in handling monetary policy, the central bank should not pursue a policy based on a mistaken perception of the economy. Such an action will undermine not only the credibility of its monetary actions but also its independence in the long run.