We must be wary

The dark clouds looming over the Korean economy are getting darker and heavier. The economy has lost vitality, with output, consumption and investment all in the doldrums due to weakened competitiveness in key industries and anti-corporate policies. The external conditions are also getting more unfavorable due to hikes in the U.S. interest rates. The Federal Reserve delivered another 25-basis-point increase in its policy rate. The Korean central bank should be lowering its rate to save the sagging local economy that is competing with a stronger global economy.

The gap with the U.S. rates has widened to 75 basis points after the latest raise, despite the first increase in a year by the Bank of Korea’s key rate to 1.75 percent in November. Korea’s monetary policy will inevitably come under pressure due to the greater risk of foreign capital pulling out of the Korean capital market with smaller returns and yields. But against the prospects of the Korean economy further slowing to the mid-2 percent range, the central bank cannot easily raise the rates.

If its U.S. counterpart continues to raise the interest rate due to moderate inflationary pressure and overheating, the BOK inevitably would have to match the steps. There is another major downside — 1,500 trillion won ($1.4 trillion) worth of household debt — against such move. When lending rates go up, consumption will become more depressed and lenders will become fretful over the debts going sour. The outsized debt in a cheap and easy interest rate environment could burst over. The Fed indicated that there could be two rate increases next year instead of three. The moderation in the pace is good news, but the motivation behind it is bad, as it could mean that monetary authorities are mindful of cooling in the U.S. economy. Negative developments in the United States will pose a risk to the export-reliant Korean economy. Authorities must help households reduce debt and encourage corporate investment to prepare for a coming storm.

JoongAng Ilbo, Dec. 21, Page 34