SEOUL– South Korea’s outgoing central bank chief called Wednesday for more interest rate hikes as part of efforts to tamp down inflation, saying such measures must be “unpopular” for the public but missing the right timing could bring about more serious consequences later.
Gov. Lee Ju-yeol of the Bank of Korea (BOK) made the remarks during a farewell online meeting with reporters as his term is set to end on March 31 following eight years at the helm of the central bank.
“Given that recent high inflation is expected to continue for a significant period of time, and we are still in strong need for reducing financial imbalances, it is necessary to keep reducing the extent of the loose monetary policy,” Lee said.
“Interest rate hikes must be unpopular measures since they result in increasing the financial burden on economic players, but our policy management experiences have taught us a lesson that failing to catch the right timing could risk bringing about bigger expenses later on for the national economy,” he added.
Lee said it is fortunate that the BOK has taken preemptive actions by raising its policy interest rate since August last year, which he said allowed the central bank to have more room to wiggle at a time when the U.S. Federal Reserve is widely expected to seek steep rate increases going forward.
The BOK has hiked its key policy rate three times since August, including the latest quarter percentage-point rise in January, as it is grappling with inflation running high amid global supply disruptions and consumption recovery from the pandemic.
Its recent rate hikes — a 0.75 percentage-point hike in total — have put borrowing costs back to the pre-pandemic level of 1.25 percent after borrowing costs were maintained at record lows for about two years to shore up the struggling economy.
Lee has said that the current rate level is still accommodative and called for the need for further increases amid worries that the Ukraine-Russia war could send energy and commodity prices even higher, putting more upward pressure on inflation.
The aggressive rate increases, however, have spawned concerns over deepening the financial burden on many people who have taken out loans to tide over the pandemic, and the possibility of an economic slowdown at a time when uncertainties have arisen at home and abroad.
Leaving office later this month, Lee said it is time to think about how the central bank can best live up to public expectations and meet more demands other than its basic roles of keeping a lid on inflation and maintaining financial stability.
“Monetary policy is basically designed to reduce economic volatility,” he said. “If demand for new roles increases excessively, the central bank will be confronted with a dilemma of not being able to carry out its basic responsibilities of maintaining price and financial stability.”
“Still, we just cannot ignore such challenges that our country is facing as polarization, inequality and environmental destruction. There should be social consensus as to how far the central bank’s role should go.”
Source: Yonhap News Agency