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[Editorial] Monetary policy shift

All economic actors should take precaution against the inevitability of rate increase

Since last month, the Bank of Korea has repeatedly sent a signal that it will move to tighten its easy monetary policy to preempt possible risks from excess liquidity and rising inflationary pressure.

Lee Ju-yeol, the governor of the central bank, said Friday that the current easing of monetary policy should be normalized in an orderly manner starting from an appropriate time, if the country’s economy continued to recover at a solid pace. The remarks, made at a meeting commemorating the 71st anniversary of the BOK’s foundation, marked the second time in a month that he hinted at the normalization of monetary policy.

When the central bank decided to keep its key interest rate unchanged at a record low of 0.5 percent in late May, Lee suggested the possibility of a rate hike this year, saying it “depends on the pace of recovery.” At the time, the BOK raised its 2021 growth outlook for South Korea’s economy to 4 percent from its previous estimate of 3 percent in February.

Earlier last week, a senior BOK official said that raising the benchmark rate at a record-low level once or twice by a quarter point might not be seen as a tightened monetary policy.

Across the world, excess liquidity injected to cope with the economic fallout from the coronavirus pandemic is being coupled with an economic rebound to increase inflationary pressure.

The US Federal Reserve, which is moving toward a gradual tapering of its quantitative easing, is expected to begin raising its key policy rate next year, which has remained at a range of 0-0.25 percent since March 2020.

Some market watchers predict that the BOK will increase its key rate as early as in October. Rising prices and ballooning household debt make its policymakers feel an increasing need to wind down monetary easing.

In May, Korea’s consumer prices rose 2.6 percent from a year earlier, the fastest pace in more than nine years. The consumer price index recorded a 2.3 percent on-year gain the previous month.

Import prices also climbed 2.6 percent last month.

Household credit reached a record high of 1,765 trillion won ($1.58 trillion) as of March, up more than 150 trillion won from a year earlier, as low interest rates encourage people to borrow more money to invest in stocks and property. Household credit refers to credit purchases and loans extended to households by financial institutions, including commercial lenders and mutual savings banks.

Bloated values of stocks and real estate widen wealth inequality and run the risk of asset bubbles bursting. As Lee rightly noted last week, readjusting expansionary policies implemented to cope with the pandemic crisis in accordance to changes in financial and economic conditions is a process essential to ensuring a stable and sustainable growth.

All economic actors now need to brace for the inevitability of rate hikes, taking precaution to minimize the impact of higher rates.

An additional 1 percent rise in interest rates is estimated to increase debt-servicing burdens on households by about 12 trillion won a year.

Data from the central bank shows that 1 in 3 local companies are now unable to repay interests with their operating profits.

The government should be no exception in preparing for a tightening of monetary policy.

Korea’s national debt, which reached a record high of 846.9 trillion won last year, is expected to increase further to 965.9 trillion won this year as the government expands spending to mitigate the fallout from the pandemic and shore up the economy.

President Moon Jae-in’s administration is planning to draw up a second supplementary budget for this year, which is worth up to 30 trillion won. The measure, which critics say is designed mainly to woo voter support by providing relief aid to all people, is out of step with the move to normalize monetary easing.

The contradiction between fiscal and monetary policies would send a confusing signal to the market and undermine the effect of either policy.

The government should put its policy focus on creating more good-paying jobs to help increase household income. Industrial restructuring and regulatory reform need to be accelerated to bolster innovative sectors, which are most instrumental to adding such decent jobs.