Policy coordination a plusThe Vice Minister of Strategy and Finance attended a meeting of the Monetary Policy Committee, the supreme decision-making body for Korea’s monetary policy, last Friday. It is the first time a government official has attended the meeting since the creation of the committee. The labor union of the Bank of Korea held a vigil carrying picket signs saying the government-led financial system needs to be brought back to reality or the Bank’s independence will be damaged. Some people raised concerns about any possible government intervention in the implementation of monetary policy.
However, in our view, the Bank of Korea and the market do not need to worry. Rather, this is an excellent opportunity to enhance the efficiency of policy coordination between the two bodies and improve communications. The Vice Minister has a right to speak as an ex officio member at the committee meeting. However, he is not allowed to directly participate in the decision of monetary policy, such as real interest rates. As Governor of the Bank of Korea Lee Seong-tae and Vice Finance Minister Hur Kyung-wook have consistently pointed out, the committee has the final say in implementing monetary policy. Therefore, it is too early to conclude that the presence of a government official will do damage to the committee’s independence.
Although it is natural that the Bank of Korea has independent status, it would be awkward to completely deviate from the government policies. The Finance Ministry, in charge of economic policy, and the BOK, responsible for monetary policy, should inevitably enjoy a robust pattern of coordination and cooperation in macroeconomic policy. The necessity for this has become more apparent since the outbreak of the financial crisis. However, subtle differences in perspective and discord between the two bodies have surfaced. For example, they have made conflicting arguments via the media and have caused much confusion to the marketplace. It was an evil of long standing which derives from the lack of policy coordination and communication.
It’s high time to put an end to the vicious practices of having disagreements in policy making in an open manner and deliberating over policies behind closed doors. In this regard, government officials should present government priorities in a transparent manner, and the committee should establish the practice of reaching a voluntary decision on monetary policy.
However, in this process, the bank should not give a false impression that monetary policy was swayed by the government’s arguments. It is our sincere hope that it will create great momentum to form closer communicative networks and policy coordination between the two parties.