[Yoo Choon-sik] Safe choice not always best policy

The Bank of Korea governor’s news conference on its monetary policy, held early this month, was largely successful by signaling to the markets that it would not rush to begin lowering interest rates despite a slump in domestic demand. However, it was less successful in providing clear guidance on conditions under which it might begin doing so.

There is nothing wrong with the long-standing practice of South Korea’s central bank avoiding making explicit promises about the future course of interest rates. However, forward guidance is an effective tool to influence the financial decisions of households, businesses and investors even without actually changing the interest rates and to prevent surprises when a change does occur.

Gov. Rhee Chang-yong cited concerns about recovering housing prices and the heightened volatility of the won currency’s value as major factors complicating the central bank’s interest rate policy. However, more common macroeconomic indicators such as weak domestic demand and subdued inflation point to the need for an early rate cut.

The bank’s policy needs to be based on a far more thorough and well-calibrated assessment of the economy’s overall situation in accordance with the Bank of Korea Act’s principles, which prioritize stable inflation as the top policy goal. There is no denying that housing prices need to be kept stable if possible, and interest rates are an important factor affecting the property market.

While the Bank of Korea Act also stipulates that the central bank should “take heed of financial stability in performing its monetary and credit policies,” stable inflation and sound economic growth are clearly the main goals it should pursue. Furthermore, housing prices and household debt are not its main responsibilities.

Both housing prices and the resultant changes in household debt are not totally dependent on interest rates but are influenced by a much more complex set of factors --both within the country and in the global economic and geopolitical arenas. There are many other policy tools and authorities that should and can take charge of these markets.

Fiscal policy, managed by the Ministry of Economy and Finance; financial policy overseen by authorities such as the Financial Services Commission; and housing supply policy controlled by the Ministry of Land, Infrastructure and Transport may be more effective. Implementing these policies in a carefully coordinated manner is absolutely essential.

In fact, the Ministry of Land, Infrastructure and Transport held a meeting of relevant ministers on real estate market policy late last week and promised to announce measures to boost housing supply in the coming months before the end of this year. It also said housing supply is scheduled to increase steadily in the future and it would focus its policy on keeping housing prices from rising too fast.

However, experts say the government’s measures announced so far and promises to do more fall far short of affecting housing prices in the near term. Another problem is related to domestic demand, which remains in a slump even as the stronger-than-expected pace of recovery in exports has prompted major organizations to revise upward their projections for this year’s economic growth.

For a long time, there was a widely accepted theory that gains from brisk exports would eventually trickle down to domestic demand, such as consumer spending and corporate investment at home. But this relationship has recently broken apart as more and more export companies spend their revenue from abroad on investing in factories outside South Korea and hiring people at those factories.

Not only the government and the central bank, but many international organizations recently raised their forecasts for South Korea’s economic growth this year, all citing brisk exports led by the information technology sector -- most notably the fast spread of artificial intelligence services. But they are not certain about the lasting effect of the export boom beyond this year, especially because domestic demand has not yet come out of the tunnel.

It is understandable that housing prices are a big concern for the central bank, as are household debt and the still-high cost of living among the general public. However, these issues are not the central bank’s primary responsibility. Other government policy authorities should take more control of these problems so the central bank can focus more on longer-term, more fundamental issues.

Economic growth, measured by common indicators such as gross domestic product changes, may be able to wait for some time before making a turnaround because the growth rate tends to become higher after a few years of subpar performance -- a phenomenon usually called a technical rebound.

But strengthening internal growth potential is much more important than a higher growth rate for a certain year on a technical rebound. For instance, 2 percent growth for a certain year after several years of less than 1 percent growth may be worse than having 1.5 percent growth each year.

We need to consider the fact that once the economy loses its power to recover on its own, its potential for growth could remain weak for a long time or forever, and people’s lives would remain troubled for a longer period than necessary. The central bank may think it is safer not to move quickly, but what appears safe is not always in the best interest of the overall economy.

Yoo Choon-sik

Yoo Choon-sik worked as the chief Korea economics correspondent at Reuters and is now a business and media strategy consultant. The views expressed here are the writer’s own. -- Ed.

By Korea Herald(khnews@heraldcorp.com)