Hawk or dove, central bank governor nominee Rhee keeps market guessing

Finance

Published: 31 Mar. 2022, 14:50 Updated: 04 Apr. 2022, 10:26

Hawk or dove, central bank governor nominee Rhee keeps market guessing

Rhee Chang-yong, Bank of Korea governor nominee, speaks to reporters at Incheon International Airport upon arrival from Washington on Wednesday. [NEWS1]

Bank of Korea governor nominee Rhee Chang-yong could be a hawk or a dove, depending on who you ask, and like central bankers everywhere, he is likely to keep the market guessing if confirmed.

His stance is particularly hard to determine given the volatile state of the world economy. The few comments he has made suggest flexibility and an openness to adapting quickly to events as they unfold.

Rhee, a director of the Asia and Pacific Department at the International Monetary Fund (IMF), was nominated to become the next central bank chief by the Blue House on March 23. He must still be confirmed by the National Assembly.

With the former Bank of Korea Gov. Lee Ju-yeol leaving the office today, the chief role is currently vacant.

"Three downsides were raised in a recent IMF report" released in January, Rhee told reporters at Incheon International Airport upon his arrival from Washington on Thursday. They include "the U.S. normalization of monetary policy, the situation in Ukraine and the slowdown caused by the Covid-19. All three factors have been realized."

He added that the Bank of Korea's decision to hold rates steady in February was made under the assumption that the Russia-Ukraine war would not develop to this degree, and discussions will have to be held with the monetary policy board.

Rhee previously cited rising inflation and household debt as some of the biggest challenges the next Bank of Korea governor will face, in an interview with Bloomberg TV in March.

"Korea's current national debt ratio is 45 percent as of late 2020, which is lower than other advanced economies," Rhee said in a separate interview with the JoongAng Ilbo in January. "But the debt ratio is projected to rise above 100 percent before 2040."

Rhee said the aging society, which raises welfare and medical costs, and expenditures in the wake of an unexpected crisis, like Covid-19, will speed up the rise of national debt.

Korea's household debt outstanding as of last year was 1,756 trillion won ($1.5 trillion), up 7.6 percent on year, according to the Bank of Korea in February.

The rise in national debt could result in a prolonged economic slowdown.

"Considering that Korea is not a country with a key currency, I believe now is the time to manage risks to prepare for a possible rapid rise of the national debt," Rhee said.

Rhee's concerns about national debt may imply that he is ready to tighten monetary policy.

"It's difficult to see Rhee be more dovish than Lee Ju-yeol," said Huh Jae-hwan, a strategist at Eugene Investment & Securities. "Since Korea's inflation is projected to rise rapidly this year, the basic direction of upping the rates will not change. When there are signs of risks, the rates could go up faster than what is expected in the market."

Korea's consumer price index was up 3.7 percent on year in February, according to Statistics Korea. The on-year increase was 1.4 percent in February last year.

Huh projected a monetary policy board led by Rhee would up the rates at least twice this year by 0.25 percentage points in the second and the third quarters and possibly once more at the end of this year or early next year.

Korea's current benchmark rate is 1.25 percent, higher than the Fed's range of 0.25 to 0.5 percent. The Fed has indicated aggressive tightening, with Chairman Jerome Powell saying the Fed was prepared to raise interest rates by half-percentage-point intervals.

Others say Rhee could ease monetary policy to boost economic growth.

In a statement following his nomination, Rhee mentioned growth as one of the most important issues for the central bank.

"There are concerns that domestic inflation and economic risks could both grow as internal and external uncertainties rise," he said. "I will focus on how to lead monetary policy while taking into account ways to balance growth, inflation and financial stability."

"It is likely he will up the rates," said Jeong Won-il, an economist at Yuanta Securities. But considering the new government's push for growth and the Bank of Korea's raising of rates before the Fed, the rate hike will not be as fast as before, when it was under former Gov. Lee, Jeong added.

During his eight-year term, Lee upped the rates five times and cut it nine. After the benchmark rate hit a record low of 0.5 percent in May 2020 following the pandemic, it has been back at 1.25 percent since January.

The president-elect Yoon Suk-yeol of the conservative People Power Party pledged to boost corporate activity and promote free markets, like deregulating Korea's crypto market and reversing capital gains taxes scheduled to take effect in 2023. Yoon takes office in May.

Regardless of the monetary direction, Rhee's international network could help the Bank of Korea cooperate with central banks overseas.

In a farewell press conference held in March, former Gov. Lee stressed the need for the Bank of Korea to cooperate with central banks overseas and international organizations as the global economy gets more intertwined and Korea's economy expands.

Rhee was with the IMF from 2014 through March this year, and before that served as chief economist at the Asian Development Bank from 2011. Lawrence Summers, who served as the United States secretary of the Treasury from 1999 to 2001, was Rhee's mentor while he was studying at Harvard University, where he obtained his Ph.D. in economics.

"Rhee will be able to cooperate with overseas central banks on interest rate policies," said Huh from Eugene Securities. "Trying to read each other's policies and regularly discussing policy directions are very different in that the former offers financial stability."

He added that monetary policy is largely an internal matter in that the level of inflation and national debt all differ by country.

"Rhee's biggest priority will be to stabilize inflation," said Cho Dong-chul, a professor who teaches international finance at the KDI School of Public Policy and Management. "The role of the monetary policy is to stabilize inflation. The economy faces a number of problems, like surging house prices, but not all of those issues can be expected to be solved through monetary policy."

The purpose of the Bank of Korea is "to contribute to the sound development of the national economy by pursuing price stability," according to the central bank's Article 1.

Rhee was a member of an economic committee on the transition team of former president Lee Myung-bak ahead of his inauguration in 2007. He was the vice chairman of the Financial Services Commission and chairman of the Securities and Futures Commission of Korea in 2008 and 2009, and served as a professor of economics at Seoul National University from 1994 to 2008. Before that, he was an assistant professor at the University of Rochester in 1989.

The next monetary policy board meeting is scheduled to take place on April 14. Joo Sang-yong, a member of the board, will preside over the meeting if Rhee does not pass the parliamentary confirmation hearing before then.

Rhee left Washington on March 29 and arrived in Korea on March 30.

BY JIN MIN-JI [jin.minji@joongang.co.kr]