Banking on the BOKThe Bank of Korea’s financial and monetary committee is to meet today to decide on the benchmark interest rate. The bank’s role has never been more important than it is now. The central banks of many countries are currently working as firefighters to extinguish the flames of the economic blaze. A passive, conservative central bank is no longer the right model.
The Federal Reserve Board of the United States is setting a good example. It is even buying corporate notes now. Previously, it would have been unthinkable for a central bank to supply capital directly to companies. On top of this, the Fed is using public funds and has taken the role of a large shareholder in commercial and investment banks and insurance companies. It has gone beyond the role of lender of last resort and been rapidly transformed into the investor of last resort.
Meanwhile, the BOK seems to be getting dragged along by exterior forces. The Korean central bank reluctantly bought bank bonds and formed a fund to stabilize them. But the scale of the project was disappointing. The central bank’s competence in making correct economic forecasts proved to be limited. It raised the key interest rate by 0.25 percent in August, and in October lowered it by a whopping 1 percent. Normally, changes in the interest rate are made with three-month intervals in between. The abrupt change in the direction of the interest rate reveals that the BOK failed to predict two months ahead.
The minutes of the financial and monetary committee don’t convey any sense of urgency, and refer to information with vague or unidentified sources. This is in stark contrast to the U.S. Federal Open Market Committee, where the heads of local branches of the Federal Reserve and financial experts have animated debates based on concrete figures and accurately read trends in the financial market.
Now is the time for the BOK to make a resolution. All economic participants are looking to the central bank. The BOK must push forward to the front line in order to resolve the credit crunch and restore our economy. It should be conducting itself with a sense of responsibility that matches its mighty power. The status and role of the central bank must be re-established.
Article 1 of the Bank of Korea Act states that the bank should concentrate only on stabilizing consumer prices. This article must be changed first. The BOK must not only emphasize its independence. Restoring the country and stabilizing the financial market are much more important now. Even the central bank is not exempt from social rejection if it does not improve. The BOK must step forward and make proactive moves.