The Bank of Korea's (BOK) monetary policy board kept its benchmark interest rate untouched at 1.5 percent Thursday, for the 11th consecutive month. But the central bank had no other choice.
Quite a few financial market watchers had anticipated a key rate hike this month, and actually, there was no shortage of reasons for raising it.
The U.S. Fed, which lifted its benchmark rate in September, will likely do so again in December. That will widen the rate gap between Korea and the U.S. to 1 percentage point, possibly touching off an outflow of foreign capital. Also, few can deny the low interest rate and resultant excess liquidity is pushing up housing prices in Seoul and its vicinity. Nor can the BOK sit and watch the widening "financial imbalance," marked by the snowballing household debt.
Just one negative factor has offset all positive ones to force the central bank to stick to the status quo ― the weak economy. A sense of crisis is widespread in the real economic sector, with most business indices going south. Small companies and services firms complain their business could hardly be worse. Larger enterprises are also reluctant to invest in new plants and equipment.
By all appearances, it was next to impossible for the central bank to raise the interest rate. Judging by the real economy alone, it might as well push down the rate further. In other words, the rate freeze was the only option it could take.
The problem is how long the BOK should, or could, keep the rate unchanged. After all, monetary policy is just for controlling aggregate demand. It cannot solve all macroeconomic problems. The Korean economy is running against the global boom, and most economists point to the Moon Jae-in administration's income-led growth policy as the reason.
President Moon's economic team should be more flexible in implementing the policy. It should allow small businesses to apply the minimum wage and the legal workweek to suit their abilities and conditions.
It is not the central bank but the government that holds the key to raising the interest rate.
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