Central banker appears casual about inflation

By Kim Tong-hyung

Soaring inflation and a historically high level of consumer debt are causing alarmist headlines on Korea’s financial stability. But Kim Choong-soo, the opinionated Bank of Korea (BOK) governor, has been ignoring the panic button and vows to continue doing so.

Although the rise in consumer prices has been at least a point above the government’s 3 percent target for every month this year through May, the bank has been reluctant to clamp down hard on money supply, judging the recovery too fragile to withstand an increase in borrowing costs.

Although the BOK raised its benchmark rate by a quarter of a percentage point to 3.25 percent recently, Kim has shown no intention of conceding to monetary policy hawks, describing the move as just part of the planned ``baby steps’’ to return rates to a “normalized” 4-5 percent.

Deflecting criticism about putting growth before price stability, the rate setters have been willing to bet that inflation is temporary and will be tamed once food and fuel prices come down.

The International Monetary Fund (IMF) isn’t so sure. In its revised forecast for the world economy last week, the IMF anticipated Korea’s consumer price inflation to finish the year at 4.3 percent, visibly higher than the BOK’s prediction of 3.9 percent, expecting the current price pressures to retain much of their strength through the end of the year.

Naturally, Kim will argue that the BOK knows better about its own backyard than researchers in Washington. About the gap in inflation forecasts between the BOK and IMF, Kim explained it merely as a difference in points of view.

``The observations on our economy will always be different when seen from the outside. The results will differ depending on where you put the main focus,’’ Kim said in a meeting with economists Tuesday.

``We are more interested in the country’s specific domestic conditions, while they (the IMF) are more interested in where we are on the course of economic recovery. Everyone sees and hears only what they want to. Nonetheless, a variety of opinions helps in assessing our economy.’’

Kim comes off as a laidback economic policymaker, especially when the inexorable rise in consumer prices, stagnant wages and increasing debt are leading to acute squeezes in living standards here.

To some observers, Kim is a revisionist central banker willing to go beyond the bank’s main realm of inflation and dabble with social policy. To his detractors, Kim is a Don Quixote who confuses giants with windmills.

To be fair, it’s certainly a difficult time for monetary policy as higher prices have been coupled with slow growth.

Sluggish consumption and investment, combined with a decaying job market, further erode confidence for economic activity.

But critics claim that Kim’s ``disregard’’ of the inflationary threat and deterioration in family finances has rendered the bank powerless to halt the damage to spending power and savings.

With the bank showing waning commitment to the inflation target, and thus a weakening ability to influence markets, containing prices depends more than ever on the government and its efforts to suppress companies, particularly in sectors such as energy and mobile telephony, from raising consumer prices.

There are concerns that the bank’s trigger shyness on rates is complicating the problems involving the country’s mountain of household debt that appears to be a ticking time bomb for the economy.

BOK policymakers have insisted that the alarming level of household debt, which at over 1,000 trillion won (about $923 billion) surpasses an entire year’s gross domestic product (GDP), justify their caution over rates, considering what future interest rate increases could do to financially precarious families.

Critics will say that the bank’s timidity was precisely what allowed household debt to get out of hand as the lengthened expectations for low interest rates have people continuing to borrow irresponsibly from zealous financial firms.

Kim, predictably, claims that the household debt situation is manageable. In a recent National Assembly session, Kim fought back against attacks by lawmakers that the BOK has lost the plot in monetary policy.

``I can’t agree that the bank has been too slow in pushing the normalization of rates. The benchmark rate has been lifted five times in the past months, and when seen by international trends, our pace cannot be judged as particularly slow,’’ Kim said.

``Obviously, household debt is an important factor that determines the pace of normalizing rates, but you can’t base your rate decisions on just that. You have to look at the debt problem both in the overall picture and how it specifically affects families in different income brackets. We need a microeconomic approach to help low-income families.’’