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Monetary complexities

Published: 18 May. 2015, 09:00

Financial authorities have to consider a lot more factors in maneuvering interest and foreign exchange rate policy now that the Korean economy has become bigger. In the past, the central bank only had to lower the interest rate to bolster the economy. Now it has to think about the ramifications for real estate and other asset markets and snowballing household debt, as well as the potential flight of foreign capital and interest rate movements in other economies, before making any moves.

The same complexities affect foreign exchange policy. Previously, authorities only had to watch the won’s movement against the U.S. dollar. Exports benefited if the won weakened against the dollar. But international trade has gotten more complicated. Samsung Electronics, which competes with Apple Inc. in smartphones and tablets, would benefit from a stronger dollar; and Hyundai Motor, which competes with European and Japanese carmakers, is affected by the weak yen and euro. To gauge a reasonable foreign exchange rate, authorities must consider current account surplus figures, international oil prices and foreign capital flow.

The Bank of Korea, as expected, left the key rate unchanged for the second month after curbing it to a record low of 1.75 percent in March. The central bank said the economy showed some signs of recovery from April and the real estate and stock markets have picked up. Raw materials and oil prices remain soft. It would have also considered that household loans increased by more than 8.5 trillion won last month, the largest monthly spike since it started keeping records in 2008.

Foreign and interest rate policy maneuvering will become more important in the future. The climate in the international market is foggy and unpredictable. U.S. authorities are expected to raise interest rates in the latter half of the year. There is also a rising possibility that Greece and Britain could leave the euro zone. There appears to be no end to Japan’s money-pumping campaign to weaken the yen. Financial and monetary authorities must keep a close watch on the international and domestic markets. The economy is headed for an abyss if authorities make one misstep in policy navigation.

JoongAng Ilbo, May 16, Page 30