BOK pays early pain over deep injury with consecutive rate hikes

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The central bank opt for rapid, moderate tightening in order to anchor market expectations early. By inflicting pain now it is hoping to avoid long term damage to the economy.

In explaining its overly aggressive monetary policy stance, the governor of Bank of Korea Shin Hyun-song said that the bank was using a “small hoe instead of a large shovel.” Right now, the central bank is in the process of pulling out the weeds that have grown after economic overheating instead of waiting for a very painful economic shock from structural maldisbalances to happen in the future.

To work the maximum amount out before it has had the chance to create more inflationary sources, raise the real demand side-person saying, as one BOK governor said today, it was important to revise upward the expected growth of Korea’s economy, stoking households price expectations, cement the prospect of a battery of price pressures combining real and nominal factors, and smooth the way to a lower level of inflation, reached, however, only by accelerating an already started reduction of fossil fuel energy costs.

Despite the positive policy outcomes, there is likelihood, however, that this proactive and pre-emptive use of monetary policy creates immediate friction for the domestic economy. These successive (and hence, cumulative) interest rate hikes impose costlier debt-servicing obligations on mortgagors, increase the cost of credit, and reduce expenditure of consumers and small to medium enterprises. Nevertheless, central bank officials see the full short term costs associated with such measures as a worthwhile price of patching up runway before the runaway inflation take a strong and crushing blow on the economy.

Hence, the Bank's decision to allow earlier pain in the short run to avoid deeper damage in the medium term will inevitably provide clear forward guidance to both domestic and international markets. The decision makership will glimpse at the consequences of consecutive tightening and, maintaining a preemptive stance, South Korea will ensure a more sustainable course to navigate the market uncertainties from around the world.

✍️Ujala

Scholar from University of Delhi, INDIA