BOK must have a clear goal
The words and actions of Janet Yellen, chair of the Federal Reserve, garner as much publicity and attention as any celebrity. The whole world is focused on the press conference after the Federal Open Market Committee meeting. The meeting in the United States takes place in the early morning in Asia. So, economic analysts in Korea wait for the conference all night. The websites that broadcast the conference live are overloaded. All the fuss is encouraged by the Fed. When the United States was faced with a financial crisis, the Federal Reserve changed its style and promoted communication with the market. It was a departure from the policy of Alan Greenspan, who gave ambiguous explanations and did not reveal clear a direction.
Ben Bernanke and Janet Yellen thought that quantitative easing was more effective when the market responded. Now that the economy has recovered and the time has come to take back the money, the Fed is more careful about communication. They want to prepare the market by hinting at situations that would trigger an interest rate hike. The goal is to prevent chaos resulting from the market making a bad prediction.
The Fed has emphasized over and over again that its two goals, higher employment and 2 percent inflation, are the right conditions for an interest rate increase. While predictions for when to increase the rate and by how much vary, the market already knows what circumstances will cause the Fed to hit the button. The Bank of Japan is also clear about its goals. It announced that it will release money until inflation reaches 2 percent, and that’s exactly what it has been doing.
The Bank of Korea recently lowered the interest rate to 1.75 percent. With deflation looming, extra money is necessary. The problem is the style of the monetary authorities. The Bank of Korea is responsible for explaining how long the low interest rate will be kept and when and what will cause them to increase it again. The interest rate cut fanned already swollen household debt. Many of those who get loans from banks to take advantage of the low interest rate are working-class citizens and small business owners.
Someday, the Bank of Korea will raise the rate. The 1 percent level cannot be maintained for long. How many of those who purchased houses under the low interest rate can endure a higher rate? Those who will suffer when the rate goes up are the lower income class. Will the Bank of Korea wait until working class people are better off and can afford to pay back their loans?
The Bank of Korea had its reasons for lowering the rate and it should tell the market in what situation it will increase it again. Then, people will take a second look at their finances before taking out a loan. A policy without a clear goal is like shooting an arrow without knowing where the target is.
*The author is the New York correspondent of the JoongAng Ilbo. JoongAng Ilbo, Mar. 24, Page 30
by LEE SANG-RYEUL