The benchmark rate dilemma

Ha Hyun-ock
The author is head of the finance team at the JoongAng Ilbo.

A “party pooper” is someone who spoils the festive mood. It also refers to the central bank. Former Fed Chairman William Martin described the role of the Federal Reserve as a “chaperone who has ordered the punch bowl removed just when the party was really warming up.” The central bank needs to raise the interest rate before the market becomes overheated to prevent adverse effects. The punch bowl is now considered a symbol of central bank’s monetary policy.

Holding the key to monetary policy, it is far harder for the central bank to raise the interest rate than cut it. Many people complain when the price of money, or interest rate, goes up. Borrowers and the stock markets become nervous as liquidity decreases. When the stock price falls, investors grow discontent. Politicians and government officials don’t welcome an interest rate hike as it could have a negative impact on the economy.

But some things are strange. Our politicians and government officials who should be reluctant about an interest rate hike seem to be looking forward to it. On August 28, Vice Prime Minister for Economic Affairs Hong Nam-ki said that housing prices will likely be adjusted when the cost of money increases. He revealed hopes that an interest rate hike will be the all-mighty key to controlling housing prices.

The anticipation for a rate hike is a full surrender of the policy authority after being crushed each time it presented real estate measures 26 times in the past. The government’s cards available to halt soaring real estate prices have almost run out. The central bank has somehow become “the last resort.”

The Bank of Korea may be displeased with the situation. I have some bitter feelings about politicians and government not opposing the rate hike. If the central attempts to normalize its unprecedented monetary policy of lowering interest rate to a historic lows amid the shock of the Covid-19 pandemic, it could end up with the burden of “the fighter against skyrocketing housing prices.”

As the bank considers raising the base rate, it acknowledges the need to calm the real estate price surge and overheated market due to excessive liquidity. The absurdly low interest rate started the spark, but the recent rise in housing prices resulted from a series of failed real estate policies. Moreover, housing supply shortages, which help housing prices surge, is not a problem that can be easily resolved. A rate hike also cannot be the magic wand to solve the problem.

An interest rate hike is obviously extreme medicine. It is an indiscriminate policy for anyone anywhere. The rate is the same for Seoul and other regions — and for the rich and the poor. The same standard applies to people who own one home or many. When you swing a blunt sword indiscriminately, the first one to be cut is the weakest.

An extreme measure is inevitable. The central bank hinted at a hike within the year, and is contemplating the time to administer the medicine. It can be as early as August 26 or could be in October. What we need now is protecting the weakest link that cannot withstand the blunt blade, as the vulnerable class will be directly hit by a rate hike. This is where the government’s fiscal policy is needed. Furthermore, the government must find effective ways to unravel the tangled real estate policies.

Idly repeating the new mantra — “Housing prices will be adjusted when the rate goes up!” — only reveals the government’s incompetence to take a free ride on the rate hike. Last month, British business magazine The Economist wrote that a central bank can remove the punch bowl easily only if fiscal policy helps. It means fiscal policy is needed to resolve the wealth disparity stemming from quantitative easing. It is not too wrong if it is applied to Korea’s situation. If the interest rate hike is desperately needed to prevent people from becoming poor at once, the government must not take its hands off the issue.