By Kim Rahn
Is it time to cut the base rate or not? Is the economy on an upturn or not?
To these two questions that are very important for economic policy, the heads of the nation’s two finance control towers are on different pages.
While Deputy Prime Minister and Finance Minister Hyun Oh-seok thinks the economy is still sluggish and needs stimulus packages including a rate cut, Bank of Korea (BOK) Governor Kim Choong-soo believes the economic situation will get better and hints at maintaining a rate freeze.
Concerns are that such different opinions between the finance and monetary authorities may prevent effective implementation of economic policies.
Since he was a nominee for the finance minister position, Hyun has emphasized a “policy mix” with the BOK to spur growth.
“The economic stimulus package should include financial measures, which include interest rate policy and financial support for exporters,” Hyun said during a media briefing, Monday. He was inaugurated last Friday.
During his confirmation hearing Hyun also said, “It is basically the role of the BOK’s monetary policy committee to decide on a key rate, but I think some stimulus measures are needed,” indicating he wants the BOK to cut the rate.
His remarks are based on his rather negative view of the economic situation. “Despite signals of a better situation in the latter half of this year, domestic demand is not reviving,” he said.
Hyun’s stance is believed to be in line with that of Cheong Wa Dae: Cho Won-dong, the senior presidential secretary for the economy, said earlier that the new government should give a clear signal to the market that it is implementing all-out measures to boost the economy.
On the contrary, Kim forecasts recovery and this is leading him to hold the key rate.
“The gross domestic product (GDP) growth for the first quarter will be larger than that of the 2012 fourth quarter,” Kim said on March 14 after a monetary policy committee froze the rate at 2.75 percent for the fifth straight month.
Introducing his talks with heads of global investment banks at the Bank for International Settlements meeting in Basel, Switzerland, Kim recently said they expressed concerns that a long streak of low rates could bring about unintended consequences.
“The central bank’s role isto solve not only short-term problems but also those that are unforeseen. We need to harmonize the two roles,” he said during a meeting with domestic bank chiefs last Friday.
Such comments are interpreted as a refutation to the calls for a rate cut. Citing similar decisions by central banks of other countries, Kim also said, “We can’t experiment with a country’s economy. We can’t easily switch from a rate hike to a rate cut.”
As to the different views between Hyun and Kim, Lee Myong-hwal, a researcher at the Korea Institute of Finance, said the difference basically comes from their respective roles.
“The government focuses on growth and job creation, while the central bank focuses on price stabilization. So, the former wants a low rate, while the latter is more careful about deciding what it should be,” he said.
Lee expects the BOK may cut the rate soon because of mounting pressure from the government, but said that it would then be criticized for lacking independence.
“If Kim reduces the rate, he will be criticized for following the new government’s stance and lacking consistency in his policy. If he doesn’t, critics will say the central bank isn’t cooperating with the government’s stimulus efforts,” he said.