Considering moderation of the tightening speed

Leaders of Group of 20 economies closed a two-day summit in Bali, Indonesia, with central banks vowing to “appropriately calibrate the pace of monetary policy tightening in a data-dependent and clearly communicated manner.” The United States, Britain, the European Union and Canada, among others, have been raising interest rates at a galloping pace to tame runaway inflation. Korea has been pushing up its base rate in sync with U.S. and other central banks. Except for Japan keeping to accommodative policy with its base rate in the zero territory since 2007 — and excluding Russia and Turkey that have been lowering rates for war and internal issues — most countries have been in the tightening mode.

The U.S. Federal Reserve whose action affects Korea’s monetary policy the most is expected to slow the tightening pace. After delivering the fourth straight hike in 75 basis points, Fed Chairman Jerome Powell indicated in early November that the rates would increase slowly, but would end up higher for longer. In a recent interview, Fed Vice Chair Lael Brainard said, “It will probably be appropriate soon to choose a slower pace of increases.” The market is predicting the rate increase to slow from 75 basis points to 50 basis points in a December meeting on signs of peaking-out in inflation data.

Despite moderation of the pace, tightening will continue for some time. The Financial Times chief economics commentator Martin Wolf wrote that central banks were “right to act decisively” as the worst they can do in the fight against inflation is to “give up too quickly.”

But Korean monetary policymakers cannot entirely follow the moves of the Fed that can act purely on domestic data. Too wide a gap with U.S. interest rates could trigger a capital flight and instability in the exchange rate. At the same time, the central bank must pay heed to interest burden on household debt nearing 1,870 trillion won ($1.4 trillion). The Cofix — the average financing cost of commercial banks that influences the mortgage rates — has neared an all-time high of 4 percent to push the maximum floating rate on mortgage loans above 7 percent. One comfort is the strengthening in the Korean won. The U.S. dollar has stabilized in the 1,300 won range.

The Bank of Korea monetary policy board will hold this year’s last rate-setting meeting on Nov. 24. Policymakers will have to deliberate on the need for some moderation on the tightening. They must take account of a slowing economy and bond market woes from rapid rises in the yields. Some board members have raised concerns over a liquidity squeeze and instability in the capital market. The board should come to a wise decision after studying the impact from two consecutive raises in 50 basis points.