The Bank of Korea (BOK) has raised the interest on short-term inter-bank loans to 3.5 percent yearly, up 0.25 percent, in what is the first rate hike in three years and five months. It feels late in coming when you consider how monetary policy has long placed greater emphasis on reducing long-term interest rates and that has caused many negative side-effects from the resulting floating money on the market.
It is our view that BOK has paid more attention to growth than to stability, and in doing so has failed to adequately adjusting the quantity and flow of cash. There has also been much criticism that it has failed to maintain its neutrality and been too considerate of government desires. Part of the problem is that former high-level bureaucrats and other figures formerly in service of the government make up the main part of the BOK's Monetary Policy Committee. Of course one cannot say the four rate cuts it has made since May 2003 were all wrong. However, many say that that those moves have not had much of an effect in helping the economy recover and that there were many major side effects, such a bigger real estate bubble. BOK needs to retrace its steps and take a good look at the course of action it has taken.
What will be important is the approach taken to implementing monetary policy. This latest decision by BOK will be even more meaningful if it signals the restoration of its original policy role. Chairman Park Seung said Tuesday that the increase is in response to the economy and prices, and that it was a pre-emptive move that took financial trends into consideration. Circumstances so far make it look like that is a bit of an embarrassing rationalization, but it is also an expression of high hopes.
Even more requiring of attention is Park's comment about the "need for a policy tone that helps the economy until next year" and the way he sounded as if that is nailed down firm. What BOK needs to be doing right now is making the positive cash flow an established structure. Further rate hikes might be necessary, depending on the flow of cash and international rates. In that sense his comment might have been better left unsaid.
The Hankyoreh, 12 October 2005.
[Translations by Seoul Selection (PMS)]
[Editorial] What's More Important than Interest Hikes |
