[Editorial] A rate freeze

Defying a thinly disguised request for a rate cut from the administration, the Bank of Korea decided to keep its key rate intact at 2.75 percent for the sixth consecutive month on Thursday. Apparently behind the decision was a belief that the rate was already low enough and that growth, though anemic in the first half of this year, would pick up in the second half.

The central bank also appeared to believe that a rate cut would not have the intended effect of boosting corporate investment and consumer spending, given ample liquidity in the market and a high level of household debt. It apparently believed additional fiscal spending alone would do the job.

The decision to keep the rate unchanged set the tone of future relations between the central bank and President Park Geun-hye’s administration. The central bank, its governor said, did not take political pressure into account when it decided to freeze the rate. He was referring to remarks made by the finance minister, who said earlier in the week that fiscal and monetary policies would produce synergy when they are coordinated.

As the pressure mounted, the central bank governor turned down a request from the presidential office to attend a conference of top economic policymakers, who were to review the nation’s economic and financial conditions last week.

The administration, unlike the central bank, was pessimistic about the nation’s growth outlook. Since it revised the growth outlook downward earlier in the month, it has been working on a stimulus package, reportedly to the tune of 17 trillion won.

Still, the administration deserved to be chided for the pressure it had been exerting on the central bank to ease its monetary policy. By doing so, it had been fringing on the central bank’s autonomy before its Monetary Policy Committee was set to review the nation’s economic conditions and make a decision on its benchmark rate. To the chagrin of the central bank, the ruling Saenuri Party also called for a rate cut.

It is not unusual for the administration to be at loggerheads with the central bank when it comes to the bank’s monetary policy. A conflict arises when they pursue different goals, with the administration bent on boosting growth and the central bank putting price stability before anything else.

Of course, the central bank will have to hold itself accountable if its forecast proves to have been erroneously made. It will have to keep its fingers crossed.