BOK freezes key rate for 11th straight month
By Kim Tong-hyung
The Bank of Korea’s (BOK) brand new monetary policy committee produced old results Thursday as a depressing combination of subduing economic activity and high prices continue to force the interest-rate setters to remain sat on their hands.
It is the 11th month in a row for the central bank to hold its policy rate at 3.25 percent. The outcome, which was unanimous, was as predictable as an election in Pyongyang, as the four new members of the seven-person board who cast their votes for the first time faced the same limited options as their predecessors did.
Talking to reporters after the rate-setting meeting, BOK Governor Kim Choong-soo admitted that the bank’s policymakers remain most concerned about the drama surrounding the eurozone debt crisis and other global uncertainties. Dismal conditions in Korea’s major trade markets like the United States, Europe and China have resulted in a sharp pullback in exports in recent months, rattling what was already a fragile recovery.
However, it’s hard to disregard the public’s growing discontent over the rising costs of living when the clock is ticking toward the presidential polls in December. Kim said there weren’t any discussions about lowering interest rates in the recent monetary policy meeting.
``We remain committed to normalizing the rate. Nothing has changed about the way we see the current level of price stability, but we will not make any move without carefully considering the conditions surrounding the economy from inside and out,’’ Kim said.
``All eyes around the world are on Europe and whether the region will be able to restore stability. The results of the French election and the expected changes in the country’s relationship with Germany and Europe obvious warrant close monitoring. And of course, Greece remains the biggest problem. But aside from Greece, we think the other issues are more stable than what was feared.’’
Exports declined 4.7 percent year-on-year during April and consumers have been unable to pick up the slack as their finances have been crippled by spiraling debt and stagnant wages.
The consumer price index (CPI), the country’s key measure of inflation, was measured below the bank’s 3 percent annual target last month, but the public’s inflation expectations remained in the upper-3s.
Policymakers consider consumer expectations of long-term price trends as important because inflation often proves to be a self-fulfilling prophecy. If people believe inflation will continue to rise, businesses will carry on raising the prices of products and services to worsen price instability and make it harder to tame.
The historically high levels of household debt, which by broader measurements already exceed an entire year’s gross domestic product, continue to pose a considerable threat to the country’s economic stability. And critics believe that the government’s latest set of measures to artificially boost demand in a slumping property market could further strain personal indebtedness.
Kim, a revisionist central banker who regularly puts growth before price stability, downplayed concerns about the new real estate market policies, which include eased lending restrictions and loosened anti-speculation frameworks, and the effect they could have on family finances.
With exports taking a hit, government officials are hanging the fate of the economy on the ability of households to take on even more debt. And judging by Kim’s comments they won’t be any objections from the central bank.
``The eased lending restrictions will lead to an increase in household loans. A revised housing market will have a positive influence on the whole economy. We should welcome the new measures if the rebound in housing market transactions boost income at a higher level than the surge in household debt,’’ he said.