Seeking best policy mix

It may have been an inevitably painstaking decision for the Bank of Korea to stay put on interest rates this month, despite inflationary pressures.

But the repercussions of employing a loose monetary policy are unsettling. The yield on three-year government bonds tumbled to 3.48 percent, hovering below the consumer price index rise of 3.6 percent in September. Investors will lose if they keep money in financial products tied to interest rates.

The bigger problem is that the Bank of Korea could send the wrong message by keeping the benchmark interest rate unchanged. The capital market has a horde of 600 trillion won ($536 billion) on the loose. Its stampede toward the stock or real estate market could create an asset bubble. We also have to worry about overspending under ultra-low interest rates. Our debt ratio against disposable income is already among the world’s highest. Yet household debt only grows.

Monetary authorities cannot simply concentrate on inflation. Most countries are putting off rate hikes to keep liquidity loose and support their economies. Foreign money could inundate the capital market with bets on a stronger won, fanning the currency’s rise. Meanwhile, economic growth fell to 4 percent in the second half and global market prospects for our mainstay exports like semiconductors have worsened. Monetary authorities should focus on three main areas: unfavorable conditions in consumer prices, the economy and foreign exchange rates.

We understood why the central bank did not move on rates - to stimulate the real estate market in September and offset volatility from foreign exchange rates this month. But we cannot ignore the abnormal level of interest rates. Assets can create bubbles at any time. But so far the low interest rates only stimulated the stock market, while the real estate market remains stagnant.

We must always keep the Japanese experience in mind. Japan’s case taught us about the catastrophic fallout that comes from a benign interest rate policy. Japan shelved interest rates in order to stop the yen’s rise following the 1985 Plaza Accord, which backfired after a massive asset bubble burst. To avoid such a disastrous end, the central bank and government must seek out the best possible policy mix. The government must supplement monetary actions with adequate fiscal and foreign exchange policies, as monetary policy will no longer be effective if ultra-low interest rates persist.