The global market is departing from an era of low interest rates and low oil prices. Both OPEC members and some non-OPEC countries agreed to reduce their crude output, while the United States is normalizing its policy rate.
South Korea’s economic policymakers frequently say that external uncertainty is increasing. But they are also producing fresh worries, as they fail to take practical countermeasures to minimize negative impacts from that uncertainy.
The nation saw gasoline prices reach a yearly high of 1,461 won ($1.23) per liter, as international crude prices approaching $55 a barrel after going below $30 a barrel early this year.
Korea’s burden from rising oil prices is aggravated by the won’s weakening against the US dollar, the settlement currency of crude trade in the global market.
Though the won losing ground was foreseeable due to the predicted rate hike of the US Federal Reserve last Thursday, the Bank of Korea did not follow suit later in the day and instead left its key rate untouched at the record low of 1.25 percent.
The dollar has risen 8.6 percent in the past three months to hover 1,185 won after touching a bottom of 1,091 won in September.
BOK Gov. Lee Ju-yeol -- in his news briefing after a rate freeze last week -- cited oil prices as one of the biggest risk factors in the global economy. He also acknowledged that domestic demand was restricted by weak consumer sentiment.
He was on point. But it is the central bank that is weakening the spending capability of households by doing nothing to raise the value of the won amid the spiraling prices of gasoline and diesel in the Korean market.
Lee and six other rate-setters of the monetary policy committee of the BOK should have raised the rate this month at the latest. They had already missed the timing to take pre-emptive measures against US hikes.
It is urgent for the BOK to shift to a hawkish monetary stance -- not only to curb the won’s rapid depreciation, but also to cut down on risks from the record consumer debt and estimated housing bubble on a step-by-step basis.
The main factor hampering consumption recovery is the 1,300 trillion won of household debt involving mortgages, which must be a bane to the gross domestic product.
Despite the seriousness of the situation, Lee pledged close policy coordination with the government in his meeting with Finance Minister Yoo Il-ho, a day after the central bank’s rate-setting.
It is questionable what this coordination will be like in the coming months. After Lee took office in April 2014, the BOK is assumed to have supported the Park Geun-hye administration’s policy to vitalize the real estate market by easing borrowing costs.
Lee cannot free himself from market criticism that the central bank’s rate-settings were much affected by the former Finance Minister Choi Kyung-hwan-led real-estate promotion, which fanned housing purchases via easing rules on mortgages from the third quarter of 2014 to the fourth quarter of 2015. Apartment prices skyrocketed throughout 2016.
For positive effects on the economy, incumbent minister Yoo and Lee should draw ways to minimize negative effects on households by signaling rate hikes in advance.
A delay in hikes, to the contrary, aimed at maintaining high property prices would suggest a meaningless, risky extension of the housing bubble.
Any scheme to hand over the crucial task of normalizing the property market and interest rates to their successors would be a disaster for the economy.
Fed Chair Janet Yellen has hinted that additional hikes could be conducted up to three times in the eight scheduled rate-setting meetings in 2017.
But the BOK’s Lee has yet to signal a hike to prevent further narrowing of the gap between Korean and US policy rates.
The Fed is scheduled to meet twice on rate-setting during the first quarter of next year. Korea’s golden time for a soft-landing of the huge consumer debt could pass by quickly.
