The Bank of Korea raised its benchmark rate from 2.75 percent to 3 percent on Thursday. On the same day, President Lee Myung-bak promised a shift in policy from growth to price stability. It was better late than never for both the central bank and the Lee administration to renew their resolve to fight inflation.
Following the rate increase, the Bank of Korea governor implied the central bank will take baby steps, a series of small rate raises, in the months ahead. He said he preferred a steady policy to a “strong policy of raising the interest rate by a large margin” at a time.
But if he wishes to send an unmistakable message to the market that he is resolute in his fight against inflation, he must not rule out the possibility of raising the rate, for instance, by 50 basis points at a time. A shock therapy will be more effective in getting his message across to all economic players concerned and thus dampening inflationary expectations.
Thursday’s rate raise had already been anticipated, given the prediction that the surge in consumer prices will not be tamed anytime soon. It was a matter concerning by what margin, not whether or not, the rate would be raised. Consumer goods should be under mounting inflationary pressure, with producer prices gaining 6.6 percent in February year on year, the highest since November 2008.
Still, few would have anticipated a shift from the Lee administration’s growth-first policy. But President Lee promised to give priority to price stability from now on, saying it is of greater concern to him than growth.
What his administration needs to do now is to overhaul the 2011 economic management plan accordingly. The plan to generate 5 percent growth and curb the consumer price index at 3 percent or lower is unsustainable under the current economic conditions.