Bank of Korea Gov. Lee Ju-yeol (Yonhap)
A little less than a decade ago, the job of a central banker could be described as important but simple: With one tool -- short-term interest rate -- they targeted inflation. In a downturn economy, when signs of low inflation emerged, they loosened the monetary policy, lowering interest rates. In an upcycle, they prevented economic overheating and high inflation with monetary tightening by raising the rates.
Nowadays, the job is much more complex, with some even saying that it requires more art than science. It has also become a lot more important, as illustrated by the impact that Janet Yellen, chair of the U.S. Federal Reserve, has on the world economy.
In Korea, Lee Ju-yeol is the point man tasked with navigating the murky waters of monetary policymaking -- expected to get even murkier due to the “great divergence” in monetary policy between the U.S. and the eurozone, China and many other countries. The U.S. recently initiated an interest rate-hiking cycle, while the rest of the major economies are still in an easing mode.
Meeting reporters at a year-end dinner Wednesday, the Bank of Korea governor named three big factors that make his job more difficult.
“Economic forecasting has always been a cumbersome task, but it has become a lot more difficult now, as the known correlations among economic factors and variables don’t seem to hold as firmly as before,” he said.
Citing a local survey in which more respondents said they would reduce spending even if the BOK cuts interest rates, he said low interest rates do not seem to boost private consumption as much as expected. In another example, the central banker cited revisions that are being made to the Phillips curve in economics, which represents the inverse relation between unemployment and inflation.
The local economy’s increased exposure to the global conditions is another factor that complicates monetary decisions, Lee said.
“The impact that an event in a foreign country has on the local economy has become far greater now than before,” he explained. “This often leads to unforeseen situations, where we have to alter our economic outlook and monetary policy stance.”
Lastly, the two missions given to the BOK -- one to support the economy’s growth and the other to maintain financial stability -- now contradict each other, Lee continued.
“Financial imbalances have grown due to a prolonged monetary easing cycle,” he said, apparently mindful of voices calling for further easing to shore up the fragile recovery. The key rate currently stands at a record low of 1.5 percent, unchanged since June.
The country should strengthen its economic fundamentals through corporate restructuring, rather than relying on monetary policy to help the economy, he stressed.
In case of a global market volatility, the government has a solid buffer -- $368.46 billion in foreign-currency reserves -- but that is not for private companies, he pointed out.
Meanwhile, the BOK said Thursday that it will reduce the number of rate-setting meetings to eight per year starting in 2017, as previously mentioned by the governor.
“Central banks of major advanced countries are reducing their number of rate-setting meetings to eight per year, and the main reason for this is that it is most desirable when a monetary policy is based on long-term goals and outlooks on future conditions,” Lee said earlier this month.
By Lee Sun-young (firstname.lastname@example.org