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(EDITORIAL from Korea Times on Dec. 3)

All Headlines 07:03 December 03, 2018

Belated action
Central bank hit for failing to take pre-emptive policy

The Bank of Korea (BOK) raised its key policy rate by a quarter percentage points to 1.75 percent Friday. The hike seemed inevitable, considering the widening interest gap between South Korea and the United States, and the ever-rising household debt.

However, the central bank's action is raising a question: Is it appropriate and timely to ramp up the rate now? The answer is far from affirmative. It does not appear to be the right time for a rate increase because most indicators show clear signs of the economy sliding into a slump.

From a pure macroeconomic perspective, the BOK is under pressure to cut its benchmark rate rather than increase it. This is evident when looking at the current economic situation. Production, investment and consumption have been declining, although they edged up temporarily in October.

For this reason, the central bank has already revised its 2018 economic growth projection down to 2.7 percent from 3 percent, citing a tangible fall in employment and investment.

Global institutions paint a gloomier picture. Nomura Financial Investment predicted the Korean economy to grow 2.7 percent this year and 2.5 percent next year. Moody's Investors Service cut its growth rate projection from 2.8 percent to 2.5 percent this year, while putting next year's estimate at 2.3 percent.

Against this backdrop, the BOK has run the risk of causing a further economic slowdown by deciding to increase its rate by 0.25 percentage points. This decision was undoubtedly hard to make as the central bank has been in dilemma over its monetary policy.

But the central bank should admit that it has brought about such a dilemma by losing the right timing for a rate hike. It kept its policy rate at an all-time low of 1.25 percent for too long ― 17 months from June 2016. Then the bank increased the rate to 1.5 percent in November 2017.

Since then, the BOK left the rate unchanged for a year, although the U.S Federal Reserve continued to raise its federal funds rate which now stands at 2 percent to 2.25 percent, leaving the U.S. interest rate higher than that of Korea.

This indicates that the BOK should have taken a pre-emptive step at least in the first half of the year to keep pace with the U.S. rate hikes amid its strong economic performance.

Efforts to narrow the Korea-U.S. rate disparity are important as the gap, if it gets wider, could cause the outflow of foreign investments from the Seoul stock market. Equally important is to curb the record-high household debt which has skyrocketed to 1,514 trillion won ($1.34 trillion) as of Sept. 30.

The long period of a low interest rate policy is responsible for the debt problem which has become a ticking time bomb for the economy. It has also caused property speculation, causing bubbles in home prices in Seoul and the metropolitan area.

One may say that it is fortunate that the BOK hiked its rate before it was too late. Yet the central bank cannot avoid criticism for taking the action belatedly. The country cannot expect a monetary policy to produce its intended results if it is not timely. This explains why the BOK should take pre-emptive action.
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