Unexpected but belated rate cut

The Bank of Korea unexpectedly cut the benchmark interest rate by a quarter of a percentage point to 2.5 percent, its lowest level since December 2010. Bank of Korea Gov. Kim Choong-soo said the central bank was joining forces with the government in its efforts to revive the economy following the approval of a supplementary budget. The cut underscores that the economy is moving at a slower than expected pace while consumer prices rose slightly over 1 percent this year. It also is a move synchronized with similar easing actions from the central banks of the European Union, India and Australia, as well as the ultra-loose policy of Japan. The Korean central bank can hardly act out of tune with the global easing trend.

The Bank of Korea again lost market credibility and predictability by taking rate action without any indication. Just last week, Kim had said last year’s 50-basis-point cut had been big enough and that Korea cannot afford to go far in rate policy as its currency is not as widely used as the U.S. dollar or Japanese yen. His comments came under fire by politicians for incongruity and slothfulness. The Bank of Korea’s monetary action on Thursday lost credibility because it looked like it had given into outside pressure. The cut was approved by a six-to-one vote in the monetary policy committee, suggesting internal disagreement.

The Bank of Korea has often been criticized for being too slow and out of tune with the market trend. It has been arguing for independence on monetary policy, but as a result, it lost confidence from the market. The central bank can exercise influence and leadership through monetary policy based on market confidence. Central banks in advanced economies indicate their monetary policy direction for the coming year to lead market sentiment. Economic performers and investors will play along when the central bank conducts and orchestrates in clear signs. Their complaint that the central bank is hard to decipher and follow can jeopardize the central bank and its role. Independence and isolation are completely different. The Bank of Korea must learn the difference.