The US Federal Reserve has raised standard interest rates 0.25 points, to 3.75 percent in what is the eleventh straight increase. That's a gap of 0.5 percent against Korea's official call rates. There were predictions that the shock of Hurricane Katrina would lead to a halt in the continued rate hikes, but the Federal Reserve gave more importance to the risk of inflation.
Of particular note is that it raised rates while still saying that core inflation (the rate of inflation excluding certain sectors whose prices are most volatile such as oil and agricultural products) is relatively low. Chairman Alan Greenspan's recent warning about over-inflated housing prices seems to have been an influence. What you see is a central bank doing what it's supposed to, giving priority to stability, a far cry from the Bank of Korea (BOK), which keeps repeating to itself that stable core inflation is the golden rule and warning about the possibility of a real estate bubble while still making policy that is a whole different story.
The Korean financial market is readying for the possibility of the end of low interest rates. The yield on three-year state bonds is 1.4 percentage points as of this year, and in past month it rose 0.4 percent. BOK's monetary policy neither led the market nor adjusted to it. Early this month BOK strongly hinted at the possibility it would issue a rate hike, and it will be interesting to see what its Monetary Policy Committee decides next month. It needs to engage in some agonizing over how to restore the role of financial policy, and not just proceed with the idea that it is going to close the gap with US interest rates.
The government, for its part, needs to stop giving the impression it is trying hard to prevent a rate hike. It says real estate prices have stabilized because of the August 31 Real Estate Measures, but loose funds on the market continue to exist as a destabilizing factor. The fact that if rates go up lower-income people who have borrowed excessively suffer as a consequence bothers you but higher rates are unavoidable. The other issue should be dealt with using separate measures.
The Hankyoreh, 22 September 2005.
[Translations by Seoul Selection (PMS)]
[Editorial] US Interest Rates and Role of Korea's Central Bank |
