ed Central bank's independence

Government should not put pressure over rate cuts

The Bank of Korea (BOK) is coming under growing pressure to cut interest rates ahead of the monthly rate-setting meeting scheduled for April 11.

On Wednesday, Cho Won-dong, senior presidential secretary for economic affairs, told reporters “it will be better’’ if the central bank lowers rates. The presidential office said Cho didn’t intend to apply pressure on the BOK to cut rates but his remarks were interpreted as reflecting President Park Geun-hye’s opinion.

On Monday, Lee Hahn-koo, floor leader of the ruling Saenuri Party, urged the central bank to lower the key rate and raise the cap on its soft loans to small- and medium-sized companies. Earlier, Deputy Prime Minister and Strategy and Finance Minister Hyun Oh-seok also said there was a need to lower rates as a means of boosting the moribund economy.

True, conditions are ripe for the BOK to slash rates. Last week, the new administration lowered its 2013 growth outlook to 2.3 percent from 3 percent and pledged an economic stimulus package including a supplementary budget.

Earlier this week, the government unveiled a set of steps to revitalize the slumping property market, including tax breaks and a cut in the supply of new homes. Consumer prices rose 1.3 percent in March from a year earlier, the slowest rate in seven months, and the inflation rate is expected to stabilize below 2 percent throughout this year.

While there have been plenty of reasons and room for rate cuts in the nation’s macroeconomic conditions, the central bank froze the key rate at 2.75 percent for the fifth straight month in March after cutting it in July and October last year. In fact, it appears unusual for BOK Governor Kim Choong-soo to remain negative on rate cuts, given his usually cooperative stance on government policies in the past. Three years ago, he even aroused a storm of ire among central bank officials by saying that the BOK is part of the government. In October 2010, he also failed to prevent the vice finance minister from attending the monthly rate-setting meeting to deliver the government’s assessment of economic conditions, to the detriment of the central bank’s independence.

Kim reportedly believes there is no need to cut rates now because the Korean economy will recover in the second half of this year, a position widely different from what Park and her key policymakers think.

For now, it’s difficult to tell which side will be right but the recent “ruthless’’ pressure on Kim and his monetary policy committee has gone too far, given the gravity of the central bank’s independence and political neutrality. Our policymakers need to recall ― once again ― why most countries maintain a central banking system.

While it’s true the most pressing economic issue is to get the economy out of the doldrums, the political community and the government should not attempt to undermine the central bank’s most important role ― keeping prices stable. History has proven this is the best way to keep an economy stable through checks and balances.