The right time for a hike?
The Bank of Korea (BOK) finally raised its policy rate on Friday. During this year's final monetary policy meeting, the benchmark rate went up to 1.75 percent from 1.5 percent in the first move after rising from a record-low of 1.25 percent in November 2017. But, the timing was a bit awkward.
A policy rate is raised to adjust inflation or the pace of growth. But the move was made in Korea at a time when the economy has been sinking. The industrial output data for October released on Friday showed all indicators pointing to negative prospects. The coincident index, measuring how the economy was doing, slipped for the seventh month in a row. At a recent National Assembly hearing, chief of Statistics Korea Kang Shin-wook said that the economy was in a downturn. Jobs show little sign of improvement. The International Monetary Fund and other institutions have all downgraded their estimates for Korea's growth outlook for next year.
The BOK's hike aimed to address household debt and the widening gap with U.S. interest rates. Household debt reached 1,514 trillion won ($1.3 trillion) at the end of September, adding 95 trillion won on year. The central bank needed to interfere to tame debt levels before bubbles from cheap liquidity blow over. A wider spread with the U.S. interest rates also could spur foreign capital to leave the Korean market. But tightening in the United States and buildup in household debt have been factors throughout the year. The hike should have been made in the first half of the year, when economic conditions were better.
Higher interest rates could further dampen corporate and consumer spending. Fiscal actions must be matched to compensate for higher borrowing costs. Yet the government remains obsessed with income-led growth, which does not help hone productivity and corporate investment. The Korean economy is in danger of falling into a vicious cycle with job insecurity worsening demand and growth. The government must act fast to remove unnecessary regulations and relax the rigidity in the labor market to make jobs in new sectors.
Authorities must pay close attention to the vulnerable class that could turn delinquent on their loan payments when interest rates go up. There were 350,000 borrowers who regularly missed their monthly obligations when the benchmark rate was at 1.25 percent last year. Consumers have had to turn to non-banking lenders charging higher rates since then because the government toughened bank loan regulations to rein in housing prices. Without backup measures, the hike will harm financial security.
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