Kim Choong-soo is at it again. The governor of the Bank of Korea, the nation’s central bank, is standing pat on interest rates. A vast majority of economists, in Korea and outside Korea, had expected a modest increase in interest rates to fight inflation, which is one of the highest in the OECD. The average in the OECD is 2.2%. Korea’s inflation rate is at 4.1%.
The macroeconomics 101 solution to fighting inflation is to raise interest rates. Clearly, Kim Choong-soo hasn’t read an undergraduate’s economics textbook in awhile. Another problem with keeping interest rates low is that it inflates real estate prices (and hence rents). Inflated real estate prices have been known to cause pretty bad problems to once high flying economies. Ah, perhaps Kim Choong-soo doesn’t know much history either. Korean banks are starting to write off bad real estate debt! Could this be the proverbial canary in the coal mine?