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BOK vacancy adds deadlock risk to inflation war

The longest vacancy on the Bank of Korea’s monetary board since 1998 raises the risk of policy deadlock as officials struggle to tame inflation while maintaining growth.

The seat held by Park Bong-heum, a former budget and planning minister appointed by President Lee Myung-bak’s predecessor, has been empty since April 2010.

The lack of a seventh member means deadlocks on interest- rate decisions are possible, because Governor Kim Choong-soo has no casting vote and there have been dissenting voices at every meeting this year. Data due tomorrow may show that consumer prices rose 4.8 percent in March, exceeding the central bank’s target for a third month, according to the median forecast in a Bloomberg News survey of 15 analysts.

“It’s a mystery and unprecedented for the position to be vacant so long,” said Kwon Young-sun, an economist at Nomura Holdings Inc. who worked at the central bank for 14 years through 2006. “Neither President Lee nor Governor Kim has clarified the reason, leaving the impression that the monetary policy board isn’t as important as it should be.”

Kim told reporters on March 10 he’s not in a position to comment on the vacancy. Officials at the central bank and the president’s office declined to comment.

In an interview with Bloomberg Television Thursday, Kim declined to comment on what the central bank will do regarding interest rates because it’s “up to the decision by the monetary policy committee.”

The downside and upside risks to the economy are about balanced and there won’t be “much difference” in the bank’s forecast of 4.5 percent growth this year when it reviews its estimates in April, Kim said in an interview in Nanjing, China, where he is attending a meeting of leaders and officials from the Group of 20 nations to discuss reform to the international monetary system.

The board boosted the benchmark interest rate to 3 percent from a record-low 2 percent in four moves since Park’s departure. The nation’s currency, the won, has climbed against the dollar this year partly because of rising rates.

At least five members must be present for monetary policy decisions, which are carried by a simple majority. In 2009 and 2010, 19 of 24 decisions were unanimous.

The system functions properly with six members plus the governor, avoiding any even split, said Lee Sung-nam, a lawmaker with the opposition Democratic Party who was herself a member from 2004 to 2008.

“It can be a big obstacle to effective policy making at a critical time when inflation is already threatening our economy,” Lee said in an interview in Seoul on March 23. “The market is losing trust in the central bank,”

Lee proposed a bill in September to lengthen board members’ terms and increase scrutiny of candidates. The measure must be approved by the National Assembly’s Strategy and Finance Committee before a vote by lawmakers.

Board members are appointed by the president on the recommendation of the bank, government departments or industry. The Korea Chamber of Commerce and Industry, responsible for recommending Park’s replacement, is still considering candidates, Sohn Young-ki, a director at the chamber, said on March 28.

The nation is in the midst of what the president describes as a “war” on inflation. Consumer prices rose 4.5 percent in February, the biggest gain in two years and more than the central bank’s target of 2 percent to 4 percent through 2012. Rising commodity and energy costs have added to price pressures.

Erik Lueth, a Hong Kong-based economist at Royal Bank of Scotland Group Plc, said adding one board member may not make much difference because the Bank of Korea is already well aware of inflation risks.

“Still, over the medium term, a new member would probably tilt the balance on the board towards the doves,” he said.

Lueth, and Kong Dong-rak, a fixed-income analyst at Taurus Investment & Securities Co., said they view Governor Kim and Deputy Governor Lee Ju-yeol as neutral and Kim Dae-sik and Choi Do-soung as “hawkish,” or more likely to push for faster rate increases. Kang Myung-hun and Lim Seung-tae are “dovish,” supporting slower moves, they said.

Kang, recommended to the board by the Ministry of Strategy & Finance, and Lim, by the Korea Federation of Banks, voted against tightening policy in January, when interest rates rose to 2.75 percent from 2.5 percent, meeting minutes show.

Kim Dae-sik, recommended by the central bank, and Choi, by the Financial Services Commission, called for an increase in September when the board unexpectedly held steady at 2.25 percent. They also sought an increase on Feb. 11 when policy was left unchanged.

“It seems Governor Kim and Deputy Governor Lee have moved together but they may have conflicting views if economic growth slows and inflation keeps accelerating,” Kong from Taurus said. “Kim does not necessarily share the internal view of the central bank and has occasionally supported the government’s policy.” This scenario could put Kim with the doves and Lee with the hawks, he said.

Choi Seok-won, an analyst at Samsung Securities Co. in Seoul, said he’s concerned about what will happen in 2012 when Kim Dae-sik, Choi Kang and Lee finish their terms. While all are eligible to continue with the president’s approval, such reappointments haven’t happened since the present seven-member system was set up in 1998, according to the Bank of Korea.

“The central bank will face bigger troubles ahead next year,” Choi said by telephone on March 23. “Rate decisions will become more unpredictable.”

Governor Kim and Lim are due to stay on the board until April 2014.

Bae Gyeong Tae, president of the central bank’s labor union, said 90 percent of the 1,100 members who replied in a January survey said the authority of the institution has weakened over the past year, partly because of the vacancy. The union represents mostly low- to middle-ranking officials and its members account for about 67 percent of the bank’s workforce.

“Given the seven-member system is stipulated by law, this is simply not right,” Bae said in an interview in Seoul on March 22. 

(Bloomberg)
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