Gov. Lee’s refreshing style

Suh Kyoung-ho
The author is an editorial writer at the JoongAng Ilbo.

The monetary policy committee of the Bank of Korea delivered an unprecedented fourth consecutive rate increase last Thursday. In line with heads-up by Governor Rhee Chang-yong, the base rate has been upped by 25 basis points to 2.50 percent. Rhee has been impressive in unequivocal communication through press briefings after rate-setting decisions.

Korea’s foreign exchange reserves stood at $438.6 billion at the end of July. The IMF’s assessing reserve adequacy (ARA) metric finds a foreign exchange ratio at 100 percent to 150 percent of a country’s short-term external debt, M2, export income and other liabilities as the benchmark for emerging economies. Although Korea’s ratio fell below 100 percent from last year, the benchmark does not apply to Korea sitting on the world’s ninth largest foreign exchange reserves. As Korea has enough foreign reserves, the IMF could advise Seoul to lower foreign exchange reserves if they hit 150 percent.

Governor Rhee also said that a currency swap agreement with the U.S. would not be of any help for the Korean won when the dollar has been strengthening against all other major currencies. A currency swap with the U.S. can be a relief during liquidity shortage or protection against sovereign credit risk, but it cannot change the trend of an exchange rate, he said. Rate increases can help partly to defend the won against further fall, but it is aimed at easing the impact on prices and production cost from a spike in import prices, not at influencing the exchange rate.

His forward guidance on monetary policy direction also had been neither too much nor too little. He said the monetary policy committee will continue with rate increases by 25 basis points during the final two meetings of this year, and also could keep up the tightening cycle until inflation falls below next year’s target of 3 percent.

Economic slowdown is inevitable as suggested by the central bank’s revised growth outlook of 2.1 percent for next year after its estimated 2.6 percent for this year, but the governor made it clear that combating inflation is more imperative than helping the economy.

Rhee did not agree that Korea was in stagflation as the Korean economy is doing better than other economies. If the global economy worsens from continuation of the Ukraine war and slowdown of the Chinese economy, policy could then shift to prop up the Korean economy.

When asked about next year’s economy and interest rate direction, Lee saved his words as he can hardly make projections beyond three months amid uncertainties. Investors should be responsible for their bets, he added.

The Bank of Korea is known to be rigidly conservative. In an address marking the central bank’s 72th anniversary in June, Rhee called for more open culture, where the central bank staff could freely speak up. He wants to change the hierarchical mood in the bank so that he could one day hear from staffers that they had been disappointed by the governor’s speech last time.

Although no one has stepped up to openly correct the governor yet, senior members jokingly say that they fear they could be challenged by their juniors.

As Rhee had repeatedly urged the central bank, researchers must not be shy about their research and reports. They must share more studies with the public for greater communication and information distribution.

Bank of Korea Governor Rhee Chang-yong announces the increase of the base rate by 25 basis points to 2.50 percent last week. [JOINT PRESS CORPS]

While it is at it, the Bank of Korea needs to consider communicating with the general public. The communication with the market has been mostly restricted to experts who are knowledgeable about monetary policy.

In his book “Value(s),” Mark Carney, who served as head of the Bank of Canada and the Bank of England, recalled that he had been invited by Pope Francis to a conference where the pope raised a glass of grappa and said, “Humanity is many things — passionate, curious, rational, altruistic, creative, self-interested. But the market is one thing — self-interest. The market is humanity distilled.” Carney asked bankers “to turn grappa back into wine, the market back into humanity.”

Carney said that the state of affairs can be best read through the eyes of the people. The economic state can be best understood through jobless people and politics through people without power.

While he headed the Bank of England, Carney held public townhall meetings regularly to meet the general public. He heard the voices from people who did not care or know about the concept of potential growth rate or the neutral rate of interest. It was not easy for him to answer honest and personal questions like “When will the economy do better?” or “When will our pay increase?” But Carney’s communication with the public would surely helped raise credibility in the government’s monetary policy.