Shoulda seen this coming

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Shoulda seen this coming

The government has waged an all-out war on inflation. Following a slight increase in the benchmark interest rate, the government yesterday announced a comprehensive plan to rein in rampant consumer price increases.

Defying an earlier prediction that it will freeze interest rates, the government decided to raise them, which will help ease people’s anticipation of further hikes.

Considering that the government has so far put more focus on growth than on stability, the decision is a significant shift in policy as the prices of daily necessities skyrocket and house rents hit unprecedented levels.

The problem is that measures like these will not curb the inflation caused by external pressures, including sharp price increases in commodities overseas. There are also internal pressures for price hikes stemming from excess liquidity and wage increases. To deal with them, the government has to come up with more measures to counter inflation down the road.

But the Lee Myung-bak administration has so far ignored the price stability factor. It is not clear whether that was a result of the administration’s dismissive attitude towards stability or its low priority among its economic policies.

If the administration had approached the issue more aggressively by raising rates and mopping up excess liquidity last year, the problem would not have gotten to this level.

Economic analysts have warned that our economy will inevitably suffer from inflation unless the administration takes back the excess liquidity it released into the market to overcome the global financial crisis.

Our economy achieved an excessive growth rate of an estimated 6.1 percent last year, almost doubling its potential growth rate of 3 to 4 percent.

The rent crisis, which started in the summer of 2009, was also repeated around the same time last year. For that reason, we have repeatedly stressed the importance of pre-emptive measures including interest rate increases.

Yet the administration has responded to market instability in a tepid manner by arguing that it was not the time to change its policies, which were centered on economic recovery. Governments often respond to economic crunches only after they break out - and then in an excessive manner. That’s why this government has been criticized for its lukewarm attitude toward all-too-foreseeable inflation. We urge the government to prepare for potential economic crises more aggressively - and in advance.
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