BOK chief faces rising pressure to cut key rate

Kim Choong-soo, governor of the Bank of Korea, is in a quandary.

As the chief in charge of the country’s monetary policy, the 66-year-old Kim has seen growing outside pressure on the central bank to lower its key interest rate ahead of the upcoming monetary policy committee meeting scheduled for Thursday.

Citing concerns over gloomy economic conditions, last week officials from the Blue House, the government and National Assembly either indirectly or directly pressed the BOK to lower the base rate that has been 2.75 percent since October.

Pushing the BOK to move along the policy lines of the new Park Geun-hye government is causing criticism and concern that the independence given to the central bank to carry out its own monetary policy is being undermined. Last month, the Park administration lowered Korea’s growth forecast for this year to 2.3 percent from 3 percent.

In bad economic times, lowering the key rate, which normally leads other commercial banks to follow suit, helps to boost consumption and corporate investment, and lessen the interest burden on households and companies.

Last month, Hyun Oh-seok, deputy prime minister for economy, told reporters that “fiscal soundness is important, but what’s also important is stabilizing the economy.” Several days later, in the economic policy package unveiled by the new administration, the government lowered the growth forecast by 0.7 percentage point and said it would draw up a supplementary budget for this year to boost economic activity.

Lee Hahn-koo, floor leader of the ruling Saenuri Party, echoed Hyun’s view. In a supreme council meeting earlier this month, Lee said, “The BOK should consider lowering the benchmark rate to boost the economy.” Following Lee, Cho Won-dong, chief presidential secretary on economic affairs, remarked, “It would be best if the BOK lowered the rate on top of the supplementary budget.”

Though Kim, who has been governor of the central bank since March 2010, is known to be a policy maker who considers it important to cooperate with the government, concerns are growing within the BOK over its autonomy in managing monetary policy.

“Deciding upon a monetary policy isn’t merely a coin toss,” Cho Tae-jin, chief of the BOK’s labor union, said last week. “The decision-making process for monetary policy should be left independently for monetary policy experts on the committee.”

Cho also criticized the BOK governor and members of the monetary policy committee being appointed by the president, which can make it difficult for them to maintain complete autonomy.

Amid the criticism, Kim did not attend a Blue House meeting Friday of a group that monitors the country’s overall economy and financial conditions.

The BOK left the key rate unchanged because “the overall economy has shown signs of “improvement in February compared to January,” Kim said at the time.

The BOK cited a 0.1 percentage point quarter-on-quarter increase in GDP in the fourth quarter last year. Also, exports grew 11.8 percent in January, which was higher than expected.

“We believe that the potential benefits of further monetary easing to the Korean economy will be limited and could, if delivered, generate structural problems over the medium term,” said Ronald Man, an economist at HSBC in Asia.

On Friday, the Bank of Japan’s new governor, Haruhiko Kuroda, announced an aggressive monetary action plan to combat deflation by injecting large sums into the economy.

“The BOJ’s action increases the probability of a policy rate cut by the BOK in its next meeting,” Man said. “However, we believe that such a decision may be too rash. Not only is it an inefficient remedy for sustaining the near-term recovery, but it can even generate medium-term challenges that would prove costly to rectify.”

By Lee Eun-joo [angie@joongang.co.kr]