Strategy and Finance Minister Yoon Jeung-hyun`s repeated comments on Seoul`s firm stance of delaying exit moves, which the market interpreted as pressuring the central bank delaying interest rate hikes, could undermine market trust in Korea`s future monetary policies, experts warned yesterday.

Although Yoon has been saying basically the same thing since autumn last year, his remarks on "too early to implement exit strategy" were highlighted in his latest interview with the local daily Donga Ilbo.

Yoon said during the interview that Seoul would maintain the current stimulus measures until November, when the nation hosts the G-20 Summit. He also said nations would discuss coordinating exit strategies at the meetings.

About a week ago at a press conference with foreign journalists, Yoon explicitly said the government firmly believed that the time was not right for an increase in interest rates, as facility investment remained weak and consumer inflation was within a manageable range.

Although Yoon said the Finance Ministry respects the Bank of Korea`s independence in conducting monetary policy, such indirect pressure by his repeated remarks gave the signal to the market that the timing of an interest rate hike could be delayed until the third quarter, analysts said.



The BOK has kept its policy rate unchanged at a record low of 2 percent since March 2009, after cutting a combined 3.25 percentage points between October 2008 and February 2009.

"There are long-term risks to the economy from delaying rate hikes, in my view. Rising inflation and misallocation of asset are obvious risks," said Sharon Lam, an economist with Morgan Stanley, in a recent report.

"Another risk with keeping the interest rate too low for too long is it can cause future monetary policy to become less effective."

Requesting anonymity due to the brokerage`s part of stakes in a state-run institution, an analyst at a local securities company criticized Yoon`s repeated comments on interest rates.

The analyst said the ministry`s quasi intervention in central bank activities could hurt the market`s trust in the government`s economic policies.

Oh Suk-tae, an economist with SC First Bank, said the government`s firm stance on the interest rate issue and the imminent change in the governor of the Bank of Korea could in fact stabilize the financial market in a short term. The new governor is likely to be supportive of the Finance Ministry, since the position is appointed by the president.

"In the short term, the government`s consistency could help stabilize the market. But in the long term, it raises a policy risk, because keeping interest rates low might turn out to be a mistake," Oh said.

Especially after the collapse of Lehman Brothers in late 2008, the concept of the central banks` independence and role as "inflation fighter" has diminished, not only in Korea but in advanced nations including the United States, he said.

An economist from a business lobby group defended the government`s stance, though.

Bae Sang-kun, director of the economic research division at the Federation of Korean Industries, said the latest economic indicators have been showing mixed signals, which can give some room for the government to delay exit moves.

"I should note that the BOK`s rate decisions were not always right. They even raised interest rates two times right before Lehman Brothers` collapse, which was obviously a mistake," Bae said. (yoonmi@heraldm.com)



By Kim Yoon-mi