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BOK too early to declare monetary easing policy

Posted December. 25, 2015 08:10,   


When the Bank of Korea (BOK) announced its monetary policy for next year on Thursday, the central bank said that it will maintain its monetary easing stance in 2016 as the recovery rate of the local economy is expected to be slow while the upward pressure on consumer prices is not expected to be too great. Although the BOK said it will pursue gradual rate hikes after the United States increased its key rates, the central bank suggested it will go in a different direction from the United States. The announcement was in line with BOK Governor Lee Ju-yeol`s remark Wednesday that the U.S. rate hike would not immediately lead to the Korean central bank`s rate increase.

At a time when the Korean economy remains in a dark tunnel, claims that economy-boosting measures are still necessary have a point. Considering the 1,200 trillion won (1 trillion U.S. dollars) in household debts, slowing exports amid slumping domestic consumption, it might be necessary to continue an expansionary economic policy. However, it seems to be too early for the central bank to shackle itself by publicly declaring that it will basically pursue monetary easing next year.

Following the latest U.S. interest rate increase, the global financial order is in extreme uncertainties. Emerging economies, such as South Korea, China, Brazil and Russia, are on the same boat amid a time of a rapid change in which the world`s largest economy is taking back the money it printed immediately after the 2008 financial crisis. If one emerging economy faces a crisis during the process in which Washington is withdrawing the greenback, the fiasco could intensify and spread like dominos. Under such a circumstance, the Korean central bank cannot maintain its eased monetary policy indefinitely. If the dollars in Korea want to leave the country for higher rates in the United States, the BOK should also increase its key rates to prevent a dollar outflow.

The BOK does not have too much time for maintaining its monetary easing policy. Interest rate policies have to be pre-emptive. In order to prevent capital flight, Korea should raise its key interest rate before a financial crisis hits an emerging economy. The BOK has lost many opportunities to lower key interest rates in its failed attempt to reinvigorate the economy. If the possibility of an emerging economy crisis intensifies much further early next year, prompting the BOK to increase its key rates, it will definitely face criticisms that the central bank changed with its words too easily.

The BOK should leave open every opportunity. Now is a time that the BOK traces the global flows of capital and take brilliant measures to absorb money without giving any shock to the market, rather than playing harmony with the administration`s economy-boosting measures. The BOK would have done enough if it had said it would manage its monetary policy "flexibly" against uncertainties. We are concerned if the central bank went too far ahead of a political season.