Don’t fear the Fed’s rate increaseAs was widely expected, the U.S. Federal Reserve on Wednesday bumped up its fund rate target by a quarter of a percentage point from 1.50 percent to 1.75 percent, slightly above the Korean policy rate of 1.50 percent. The last time U.S. rates were above Korea’s was in August of 2007. The U.S. central bank is continuing with its post-2008 ultra-loose monetary policy.
The possibility of capital flight from Korea is low for now. Foreigners invest money in Korean assets not just for interest gains, but after considering a wide range of factors, such as macroeconomic conditions, corporate performance and currency rates. The two economies reversed their interest rates before, between June of 1999 and March 2001 and between August 2005 and September 2007. Foreign investors did not abandon Korea during those times. The rate gap does not pose a risk when the economy is performing well.
Korea cannot put off its own rate increases for long when U.S. rates move higher. The Bank of Korea won’t be able to match the Fed’s number of rate increases — two more this year and three more expected in 2019 — given Korea’s colossal household debt of 1,450.9 trillion won ($1.3 trillion) and its impact on exports and capital investment. Still, it cannot allow a yawning gap to develop. The market is expecting the Bank of Korea to increase interest rates twice this year.
Korean interest rates will inevitable have to go up, although when and by how much remains to be seen. Households, corporations, and the government will all have to prepare for higher rates. Households should check their books to make sure they can pay their debts. The government and corporations must watch out for any volatility.
The government’s role grows in importance at during times of uncertainty overseas. What happens beyond its borders is out of its control, but it can minimize domestic repercussions. The government must retool its economic policy to better fit current conditions. It must consider the additional interest burden on small and medium-sized companies that are struggling with the sharp rise in the minimum wage.
According to Cho Joon-mo, an economics professor at Sungkyunkwan University, 44.3 percent of Korean workers will receive the minimum wage when it is eventually lifted to 10,000 won. By then, the minimum wage will become a standard, and the state, not employers, will be responsible for deciding salaries in the private sector. Some salaried workers whose annual compensation exceeds 80 million won will receive raises due to the minimum wage increase.
The government should rethink the minimum wage increases and eliminate the confusion over the policy. Economic policymakers should fine-tune their positions ahead of the historic summits with North Korea.
JoongAng Ilbo, March 23, Page 30