BOK’s Independence

Meddling in Monetary Policy Would Backfire

Sandwiched between calls for lowering and freezing interest rates, the central bank's concern is palpable before its rate-setting meeting Wednesday. One camp of economists say the Bank of Korea should pull down its key interest rate to prepare for possible economic setbacks. The other group maintains the call loan rate be frozen at its present level to stave off looming inflation. It's been a classic dilemma for the central bank, but the difference this time for the BOK is the political burden.

Different experts calling for relaxing or tightening of monetary controls have their own logic. The former rightly point to the specter of a global recession sparked by the U.S. subprime crisis and the consequent financial turmoil. The U.S. Federal Reserve Board slashed its benchmark rate by a total of 1.25 percentage points to 3 percent in just over a week. The Bank of England has trimmed its own rate and the European Central Bank will likely do so soon, adding to the BOK's worries.

The latter group, too, is justified in worrying about price spirals, which have gone beyond the central bank's target range, adversely affected by soaring crude oil and other commodity prices. Economists generally agree that slow growth amid price stability is better than rapid expansion amid galloping inflation. It also may be too early to come up with an economic stimulus, as the estimated GDP growth for 2007 hovers above initial projections. In short, the economy is in not so poor shape.

While the easy-money school stresses the importance of policy-making timing and preemptive steps, the proponents of financial austerity caution against the hasty exhaustion of recession-fighting ammunition. The former worry about slumping exports due to the Korean won's appreciation. The latter, however, say local exporters should prepare for a parity rate of an 800-won range against the U.S. dollar. We do not believe it would matter much if the BOK pares the rate slightly or freezes it this time, though.

What worries us more than the monthly rate adjustment are the moves of President-elect Lee Myung-bak's aides. Kang Man-soo, one of the strongest candidates for Lee's first finance minister, said recently the government and the central bank should ``engage each other like two cogwheels.'' This is a thinly veiled pronouncement to influence the BOK's monetary policies ― sometimes for political motives. And it came from an official who was the vice finance minister when the currency crisis broke out.

We all remember how former President Kim Young-sam bolstered economy using all policy means available in the early days of 1993 and ended his tenure with the country's worst financial meltdown. That should not be allowed to repeat itself.