The Bank of Korea’s indication that monetary easing may be coming to an end should prepare all economic players for higher interest rates in the not-too-distant future.
BOK Gov. Lee Ju-yeol made it clear Monday that the central bank would maintain monetary easing “for the time being,” saying the recovery was not strong enough yet and inflationary pressure on the demand side was not high.
But the message he wanted to deliver through a statement marking the central bank’s 67th anniversary was clear: It should consider ending its loose monetary policy if the economy is put on a path for a more robust recovery.
This is an evident turnaround for the central bank, which, since Lee took office in April 2014, had lowered the benchmark rates five times – from 2.5 percent to 1.25 percent -- until June last year. The key rate has been kept unchanged since it was brought down to the record-low 1.25 percent a year ago.
Lee’s signal for a possible end to monetary easing came at the right time. The US Federal Reserve is almost certain to increase its key interest rate for the third time in six months, with an additional hike anticipated in September.
There have been some palpable signs of economic recovery in Korea -- as seen by the expansion of exports and what is seen as overheating in the real estate market. The benchmark stock index is regularly hitting records.
Lee himself expected the Korean economy to grow faster than the BOK’s April projection of 2.6 percent.
The main reason the BOK has kept the record-low key rate for the past year is that it has not been convinced about the economic recovery. The central bank’s monetary easing, along with expansion of fiscal spending, helped the recovery pick up speed. There have been downsides as well, like the surge of household debt which stood at 1,359 trillion won ($1.2 trillion).
The Fed’s move to raise the key US rate would pose a major challenge to the BOK over its monetary policy. Most of all, it should keep the local rate at an optimal level to avert capital outflow, while at the same time prevent cooling down of property and stock markets and forestall debt crisis among marginal households.
As Lee said, the end of monetary easing in the country is not imminent. What is certain, however, is that the era of low interest rates and abundant liquidity is leaving us and that we are entering a new era of higher rates.
That commands the fiscal, monetary and financial authorities to make concerted efforts to foster the health of each economic sector -- government, businesses and households. It was well advised in that regard that new Deputy Prime Minister and Finance Minister Kim Dong-yeon met BOK’s Lee on Tuesday.
The most urgent step to prepare for an end to monetary easing is deleveraging in both the public and private sectors. More specifically, meticulous measures are needed to alleviate problems stemming from overbearing debt of marginal households and firms.
Any such measure would not be easy, as they should not throw cold water on an economy that has only just begun to shows signs of recovery.
Policymakers should also bear in mind negative effects from trade protectionism -- as seen by the US President Donald Trump administration’s move to renegotiate the Korea-US free trade agreement -- and geopolitical risks caused by North Korea’s nuclear and missile threats.
On top of all these come the challenge to draw up a midterm strategy to foster the national economy in a new environment highlighted by monetary tightening.