By Kim Jae-kyoung
Staff Reporter
Many global economists have warned Korea about the growing risk of an asset bubble due to what they believe is a protracted low interest rate policy, which will fan inflationary pressure and lead to misallocated assets.
The warnings came after the Bank of Korea (BOK) left the key interest rate untouched at the record low level of 2 percent for the 13th consecutive month Thursday.
The rationale behind the rate freeze was that lingering uncertainties both at home and abroad are still overshadowing the local economy, while consumer inflation and the local property market has been well kept in check.
However, global economists answering a survey by The Korea Times contended that the central bank has lost its chance to raise key rates.
"Emerging economies, including Korea, used low interest rates to juice up property to offset the export downturn during the global crisis," independent economist Andy Xie told The Korea Times via email from China. Xie, a former economist of Morgan Stanley Asia, is well known for predicting the 1997-1998 Asian financial crisis.
"It's making a bubble to offset the impact of another bubble bursting. It doesn't feel painful now, but the cost will come. Korea should raise the interest rate as soon as possible to allow property to normalize. Delaying creates more pain later," he added.
Tim Condon, a senior Asia economist with ING Group, said, "I have been expecting the BOK to start normalizing the policy rate for some months. A 2 percent policy rate is too low in an economy growing by 5 percent with 3 percent consumer inflation."
"I also think that the record low rate will rekindle excessive property price inflation. Property price inflation may accelerate to a worrying rate in the second half of 2010, which now looks like the earliest date for a rate hike," he added.
In fact, there are growing fears that record low rates will cause costly misallocation of assets.
"There are long-term risks to the economy from delaying rate hikes. Rising inflation and misallocation of asset are obvious risks. Another risk is that a protracted low-rate policy can cause future monetary policy to become less effective," Morgan Stanley senior economist Sharon Lam said.
"If the rate level is not normalized now, there will be limited room to cut rates when the economy slows again. This runs the risk of a near zero interest rate in the worst case scenario, which we think the central bank should avoid," she added.
At his last monetary policy committee meeting Thursday, outgoing BOK Governor Lee Seong-tae ruled out the possibility of a real estate bubble.
"I don't think that risks of an asset bubble exist at this moment as transactions have remained inactive even though prices have risen moderately," he said.
Regarding inflation, he also said that the central bank does not feel pressure to take action anytime soon, saying that consumer price inflation has decelerated somewhat and is expected to remain stable for some time given recent movements of international raw material prices," he said.
Lee forecast that the Korean economy will expand by 4 to 5 percent this year from 2009, with consumer prices rising 2.5 to 3 percent.
"In the coming months, the Korean economy will likely sustain itspositive growth trends, on the back of the recovery of domestic demand and consistently rising exports, but there is a considerable degree of uncertainty over the actual growth path, caused by the fiscal problems of euro zone countries with excessive public debt," Lee said.
kjk@koreatimes.co.kr
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