[Editorial] Monetary measures

Last week’s decision by the central bank to freeze its benchmark interest rate at 2.75 percent for a fifth straight month has been viewed by many economists as out of step with the need to spur the sluggish economy.

As the grounds for continuing to leave the rate unchanged, the Bank of Korea cited the signs of U.S. and Chinese economies beginning to recover and the local economy rebounding after probably hitting the bottom at the end of last year. Their argument still appeared weak for justifying the central bank’s inaction when the economy has grown at a pace of less than 1 percent on-year for seven consecutive quarters.

BOK Governor Kim Choong-soo did not close the door for a rate cut, saying that the central bank might consider taking action, if certain economic conditions warrant policy harmonization with the government. Most analysts see the key interest rate will soon be cut as the new government is poised to take measures to stimulate the stagnant economy.

Kim might be seen as somewhat politicized in handling the rate policy. As he has said, the effect could be expanded when monetary and fiscal policies are coordinated. But it is also possible that a large-scale fiscal expansion would limit the scope of monetary steps.

The central bank would also have difficulty explaining why it could not have cut the rate earlier, if economic conditions might remain little changed as forecast by many analysts. It may not be wrong for the central bank to be cautious, but it needs to be more flexible and avoid limiting its own maneuvering space.

A wider debate has been under way among local economic experts over the role of monetary measures in spurring the sluggish economy. Some say monetary expansion is needed to prevent the economy, which is facing the risk of a sharp decline in asset prices and a steep increase in the value of the Korean currency, from tumbling into deflation and a long-term recession. Others argue eased monetary policies would lead to further increasing the household debt, which stood at 937.5 trillion won ($841.5 billion) as of the end of September, tantamount to more than 70 percent of the country’s gross domestic product for 2011.

It will fall on the shoulders of the new economic team to work out the best possible mix of policies to boost the economy. But it should be reminded that a lack of good policies is not the cause of the prolonged economic slump. The emphasis in the discussion should eventually move to measures to restructure the economy, increase corporate competitiveness and enhance the entrepreneurial mind.