Rate freeze should not lead to higher inflation
In anticipation of a possible slowdown in surging inflation, the central Bank of Korea (BOK) kept the key interest rate unchanged at 3.5 percent last week. The BOK's decision put an end to seven straight rate hikes that have taken place since August 2021.
The BOK is supposed to prioritize the curbing of commodity prices. This requires raising the key rate and prompting a possible economic recession. The central bank runs the risk of failing to tame soaring prices once it freezes or lowers the rate.
The freezing of the rate is taken to mean the BOK is more worried about a possible economic slowdown than spiraling prices. Well reflecting such concerns, the BOK revised down the nation's economic growth rate to 1.6 percent from 1.7 percent for this year. The lowered growth projection by 0.1 percentage point verifies the economy is cooling down fast.
Diverse economic indicators also back this up. For starters, Korea's GDP growth shifted to negative territory and shrank 0.4 percent during the fourth quarter of last year from a year earlier. Korea's economy is projected to continue contracting in the January-March period this year should the current trend continue.
Most worrisome is the continued drop in exports for the fifth consecutive month, buffeted mainly by the drastic decline in outbound shipments of semiconductors to major overseas markets such as China, in particular.
Against this backdrop, the nation's trade shortfall as of Feb. 20 continued to widen, reaching 40 percent of last year's record total deficit.
The possible depreciation of the Korean won against the U.S. dollar may help narrow the trade deficit as it will boost overseas sales by making Korean products cheaper to buy abroad. However, the BOK's rate freeze has intensified a sense of instability beyond what was expected.
Currently the interest rate gap between South Korea and the United States stands at 1.25 percentage points (based on the highest range). It is not desirable for Korea to maintain rates higher than the U.S. with the dollar being the world's key currency. Worse still, it is worrying that the U.S. is poised to continue tightening its monetary policy for a while.
The U.S. Federal Open Market Committee is highly likely to raise the rate in meetings slated for March 20-21. The Federal Reserve's move will accelerate the potential outflow of capital from Korea's market, further weakening the won's value against the dollar. This scenario is all the more ominous given the growing geopolitical risks resulting from North Korea's repeated ballistic missile launches.
The BOK's primary task is stabilizing prices. Laws require the central bank to focus on reining in prices over rejuvenating the economy. How to cope with an economic slowdown is the prime mission of the presidential office and the Ministry of Economy and Finance. The BOK should be able to exercise its authority in monetary policy without being influenced by the government. That is the reason why the BOK was separated from the government.
Despite the BOK's seemingly rosy prospects, commodity price growth has shown no signs of slowing down, picking up by more than 5 percent in January alone. Taming rising prices should be the key to stabilizing the livelihood of the people. More efforts should be made to avoid a possible adverse impact on prices and the financial market due to the recent freezing of the key interest rate.
Also, the government and businesses should make combined efforts to reinvigorate the sagging national economy. President Yoon Suk Yeol vowed to mobilize all efforts to increase exports. In a strategic meeting on Thursday, Yoon emphasized the need to promote exports as the most feasible way to tackle the monumental challenges ahead. The government now needs to offer detailed measures to implement the policies promptly to help beleaguered businesses.
In anticipation of a possible slowdown in surging inflation, the central Bank of Korea (BOK) kept the key interest rate unchanged at 3.5 percent last week. The BOK's decision put an end to seven straight rate hikes that have taken place since August 2021.
The BOK is supposed to prioritize the curbing of commodity prices. This requires raising the key rate and prompting a possible economic recession. The central bank runs the risk of failing to tame soaring prices once it freezes or lowers the rate.
The freezing of the rate is taken to mean the BOK is more worried about a possible economic slowdown than spiraling prices. Well reflecting such concerns, the BOK revised down the nation's economic growth rate to 1.6 percent from 1.7 percent for this year. The lowered growth projection by 0.1 percentage point verifies the economy is cooling down fast.
Diverse economic indicators also back this up. For starters, Korea's GDP growth shifted to negative territory and shrank 0.4 percent during the fourth quarter of last year from a year earlier. Korea's economy is projected to continue contracting in the January-March period this year should the current trend continue.
Most worrisome is the continued drop in exports for the fifth consecutive month, buffeted mainly by the drastic decline in outbound shipments of semiconductors to major overseas markets such as China, in particular.
Against this backdrop, the nation's trade shortfall as of Feb. 20 continued to widen, reaching 40 percent of last year's record total deficit.
The possible depreciation of the Korean won against the U.S. dollar may help narrow the trade deficit as it will boost overseas sales by making Korean products cheaper to buy abroad. However, the BOK's rate freeze has intensified a sense of instability beyond what was expected.
Currently the interest rate gap between South Korea and the United States stands at 1.25 percentage points (based on the highest range). It is not desirable for Korea to maintain rates higher than the U.S. with the dollar being the world's key currency. Worse still, it is worrying that the U.S. is poised to continue tightening its monetary policy for a while.
The U.S. Federal Open Market Committee is highly likely to raise the rate in meetings slated for March 20-21. The Federal Reserve's move will accelerate the potential outflow of capital from Korea's market, further weakening the won's value against the dollar. This scenario is all the more ominous given the growing geopolitical risks resulting from North Korea's repeated ballistic missile launches.
The BOK's primary task is stabilizing prices. Laws require the central bank to focus on reining in prices over rejuvenating the economy. How to cope with an economic slowdown is the prime mission of the presidential office and the Ministry of Economy and Finance. The BOK should be able to exercise its authority in monetary policy without being influenced by the government. That is the reason why the BOK was separated from the government.
Despite the BOK's seemingly rosy prospects, commodity price growth has shown no signs of slowing down, picking up by more than 5 percent in January alone. Taming rising prices should be the key to stabilizing the livelihood of the people. More efforts should be made to avoid a possible adverse impact on prices and the financial market due to the recent freezing of the key interest rate.
Also, the government and businesses should make combined efforts to reinvigorate the sagging national economy. President Yoon Suk Yeol vowed to mobilize all efforts to increase exports. In a strategic meeting on Thursday, Yoon emphasized the need to promote exports as the most feasible way to tackle the monumental challenges ahead. The government now needs to offer detailed measures to implement the policies promptly to help beleaguered businesses.
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