We need market-friendly ratesThe Bank of Korea upped the benchmark interest rate by a quarter percentage point to 3.25 percent last week, the fifth hike in the last 11 months. It did so despite a tapering off in economic growth. The central bank’s move appears necessary to rein in inflation and a surge in household debt.
The bank, which suggested more tightening moves in the second half, needs to be more pre-emptive next time, as the latest hike took place after the rise in consumer prices started easing in March. It must keep in tune with the market in its interest rate calculations to enhance predictability and credibility in monetary policy.
The BOK must pay close attention to the repercussions of its latest move. Consumer debt has topped 800 trillion won as of the end of last year. The resultant rise in borrowing costs due to the rate hike could trigger insolvencies in some households and throw cold water on the slowly-improving real estate market.
Mounting debt woes and a sluggish real estate industry could hurt the broader economy, with the market already sensitive to the sustained tightening.
So far, the monetary authorities have been criticized for keeping interest rates too low in order to please the government and help it reach its goal of economic growth of more than 5 percent. The low interest rates have also fanned debt-financed consumer spending.
But for a couple of months, the government has been wanting higher interest rates in order to tame inflation. The authorities must keep in mind that an overly fast tightening could be as perilous to the economy as excessive easing.
The Bank of Korea needs to drive its monetary policy in accordance with the market and its expectations. The economy has suffered too much from authorized interest rates since the Asian financial crisis and the more recent global financial crisis. The corporate sector as well as consumers can invest and spend in ways that help the economy when monetary authorities direct interest rates in a predictable manner. In that way, the central bank could also keep excessive government meddling in interest rate policy at bay.