Decoupling gives BOK leeway for rate tightening

By Kim Jae-kyoung

Emerging economies, including Korea and China, are getting closer to decoupling themselves from the Western economies, with the region becoming less reliant on trade with the West on the back of rising domestic demand, according to the Bank of Korea (BOK) Wednesday.

The “decoupling” debate has opened up again, as the U.S. economy has shown signs of slipping back into a slump, while emerging economies have continued robust growth. Analysts say that the decupling is expected to give more leeway for the BOK to maintain tightening policy despite lingering uncertainties abroad.

BOK Governor Kim Choong-soo was the one who reopened the debate here. At a recent economic forum, the top central banker said, “The Korean economy will continue its robust growth despite lingering uncertainties triggered by a slowdown in the U.S. economy.”

In its latest report Wednesday, the central bank supported Kim’s such views, forecasting that the global economy will go more on decoupling. “Coupling between Asian and advanced economies, such as the U.S. and Europe, will lose momentum, affected by a reduction in processing trade and an expansion in domestic demand in China,” BOK economist Park Dong-jun said in the report.

The view over the decoupling is shared widely by global economists. In his recent remarks to a French daily, IMF chief economist Olivier Blanchard said that notwithstanding the strong growth figures in Europe, economic growth in Europe and the United States is likely to remain weak

“A U.S. slowdown would have an automatic impact on growth in Asia in the short term, but decoupling between emerging market and rich economies is possible in the medium-term as Asian and Latin American countries shift to a greater degree of internal demand,” he said.

The decoupling trend has become more apparent following the global financial crisis. In 2009, China and India grew 9.1 percent and 7.4 percent, respectively, while the U.S. and Europe contracted 2.6 percent and 4.1 percent.

It seems that everybody is on the same page over the decoupling but views are split over why the BOK has repeatedly raised the issue. Some analysts said that it is trying to secure more leeway to maintain credit-tightening policy.

“I agree that decoupling ― or more accurately, increasing share of emerging markets and declining share of developed countries in the global economy ― is a well-established long-term trend,” Standard Chartered First Bank Korea Research Head Oh Suk-tae told The Korea Times.

“Decoupling means that what’s happening in emerging market economies will become more important than what’s happening in developed economies,” he added. “I suspect that the BOK emphasizes decoupling to maintain its tightening stance amid concerns on global double dip.”

The central bank is expected to deliver another rate hike at the monetary policy committee meeting today in order to normalize its monetary policy and curb inflationary pressure in a preemptive manner. It left its key rate untouched at 2.25 percent in August. It hiked the rate by 25 basis points to 2.25 percent in July after keeping it fixed for 16 months.