The Korea Herald

지나쌤

[Editorial] U.S. interest rate

BOK should consider raising key rate

By 이윤주

Published : May 20, 2016 - 17:24

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Korea’s financial market is facing another challenge from an unfavorable external factor. Reversing earlier skepticism about a base rate hike in the U.S., an increasing number of market participants are sharing the view that the Federal Reserve has become hawkish.

More people are betting on a hike next month after the Fed’s rate-setters’ minutes of the last gathering -- unveiled Thursday -- hinted at their hawkish stance for the next meeting June 14-15.

Given the record-high household debt in Korea, an earlier-than-expected rate hike in the U.S. might be a “catastrophe” for domestic private consumption. The Bank of Korea would have no room to maintain the record-low rate, and will be forced to consider following suit to avoid any capital outflow.

The BOK should have taken preemptive measures after the Fed started its interest rate normalization process last December. Despite widespread expectations of a second round of a U.S. rate hike during the first half, the Korean central bank did not say anything about the urgency for blocking a narrowing gap between rates in both countries.

On the contrary, the BOK is said to have contemplated a base rate cut in response to reports that the government wishes to vitalize the lackluster private consumption by easing the rate further.

The BOK fortunately has not slashed the rate further over the past half-year since the Fed’s hike. A freeze was a better choice than a cut. However, from now on, a further freeze would not be resilient to the fears of a U.S. hike. Time is running out, if the monetary policymakers consider the local currency’s rapid weakening versus the dollar seriously.

The dollar, which traded at about 1,130-1,140 won last month, is hovering around the 1,190-won mark and has been rapidly gaining speed over the past few weeks.

If the trend continues, foreign investors may become less attracted to won-denominated assets. In addition, Koreans will have weaker purchasing power amid higher import prices.

The BOK must raise the key rate by at least 25 basis points from 1.5 percent to 1.75 percent per annum at the next monetary policy meeting, slated for June 9. The Washington-based Fed is considering raising its rate from the 0.25-0.5 percent level to 0.5-0.75 percent.

Korea has already experienced that the low key rate era has triggered a variety of side effects, including mounting household debt and deterioration of banks’ earnings structure, though it has somewhat contributed to vitalization of the economy.

Further, it is nonsense for the country to push for quantitative easing like past cases in the U.S., Japan and some EU countries. The Korean won is apparently different from key currencies such as the dollar, yen and euro. A Korean version of QE, which was mentioned by some officials as an option, is also illogical. The scheme must be scrapped immediately.

It is apparent that a local version of QE is aimed at bailing out the financially distressed shipbuilders. The BOK is not an entity that prints banknotes for any specific industry.