Bank of Korea Gov. offers insights into central bank signaling

Finance

Published: 28 Aug. 2022, 15:50

Bank of Korea Gov. offers insights into central bank signaling

Bank of Korea Gov. Rhee Chang-yong speaks at a press conference held following the Monetary Policy Board meeting held in central Seoul on Aug. 25. [YONHAP]

Bank of Korea Gov. Rhee Chang-yong offered rare insight into the central bank's signaling during times of crisis in an address at the Jackson Hole Economic Symposium on Saturday.

In an esoteric discussion about unconventional monetary policies, which include quantitative easing and unconventional forward guidance, the central banker discussed how he and the bank communicate with the market.

He said that due to the fast changing economic environment, signaling has become difficult, especially so-called unconventional forward guidance, whereby central banks seek to give more benchmark-based information about the direction of monetary policy.

"An oversimplified communication strategy doesn't properly provide insights into how policy is likely to evolve in rapidly changing environments," Rhee said, according a transcript of the speech distributed by the central bank before the event. "Oversimplification leads markets to underestimate uncertainty, which probably makes it difficult for central banks to exit."

The message was delivered as central banks around the world struggle to tame inflation without tipping their economies into recession. Signaling has become especially important, and some noteworthy failures have been witnessed, in particular U.S. Federal Reserve Chair Jerome Powell's ultimately unkept promise to limit rate increases to 50 basis points.

The annual Jackson Hole event in Wyoming brings together policymakers and economists for lectures and discussions. This year's theme is "Reassessing Constraints on the Economy and Policy." The three-day event started on Aug. 26.

During his talk, Rhee recounted how after the historic 50-basis point increase in July, the bank came up with a detailed forward guidance strategy.

The statement from the bank after the increase only offered an indication that rates would be increased again if warranted, while at a press conference, the bank offered more detail guidance, saying "gradual, 25-basis-point increases will be appropriate for some time as long as inflation paths remain as currently presumed."

"This was intended to give us more flexibility on the future policy path, while providing the minimal forward guidance that market experts would like," Rhee said in the Jackson Hole meeting address.

While noting a number of weaknesses in the strategy, Rhee said that "unconventional forward guidance policies have been quite effective in lowering long-term interest rates and holding up output."

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