Bank of Korea to Everyone: Eff You, ‘Nuff Said

Bank of Korea Raises Interest Rates
Read other posts on this blog: the Bank of Korea has a difficult job. It meets every month to determine the path of interest rates. The financial markets attempt to predict what the Bank of Korea will do, and financial instruments, including the value of the Korean Won, move in anticipation of policy adjustments. This happens with every currency around the world. Some people believe that transparency with respect to the scope and timing of interest rate changes is important. WRONG. Independence, and the element of surprise are far more important elements that the Bank of Korea should fight hard to retain. By taking the market by surprise this week, it has done that. Bravo to the Bank of Korea, as it has collectively said to the world: back off.

Why Are Independence and the Element of Surprise Important?
You may believe that the idea of transparency when making policy is best. It is indeed intuitively attractive to believe that. However, the Bank of Korea needs to have the ability to communicate with the nation’s citizens and other countries. If everyone anticipates that the Bank of Korea will increase interest rates next month, then the price will move…now. By raising rates when no one expects, the Bank of Korea has communicated clearly that inflation will be fought, and that on balance, it is more important than the weaker global economic climate. In other words, critics of the Bank of Korea have requested transparency, and in this move, at this time, the Bank of Korea has wielded its independence and communicated that fact directly to the country’s people and companies.
The element of surprise is important because without it, the communicate to the market would actually be less clear. There are many pundits who make their living trying to predict policy changes. If the Bank of Korea simply followed the predictions, then the effect of the actions would be minimall. However, when there is an element of surprise, then the changes are more likely to have the desired effect. It is no surprise to the Seoul Gyopo Guide that the Korean Won rose in value against other currencies rose as result of the most recent interest rate increase. That is because the market was not anticipating an interest rate increase at the time. The Bank of Korea will need to maintain and carefully use the element of surprise in order to navigate the numerous cross-currents affecting Korea’s economy and population.

To Apartment Owners and Chaebol: You Will Have to Take the Pain
As explained before, the Bank of Korea faces tough choices. By raising interest rates in a surprise move, it has passed the following message: real estate isn’t likely to recover in the near term, and the quality of Korean companies’ products needs to be maintained, if not improved. This will not make either groups happy, of course. However, inflation and household debt are now the central issues. Because the situation is fluid, the Bank of Korea needs to retain its flexibility. Not telegraphing every single policy change does exactly that.