President Moon Jae-in’s reappointment of Lee Ju-yeol as governor of the Bank of Korea last Friday deserves a positive evaluation.
The reappointment was an appropriate step to guarantee the independence of the central bank and the continuity of its monetary policy. It is also exceptional, considering that Moon has usually replaced heads of major public institutions named by his predecessor, former President Park Geun-hye. Lee is the first Bank of Korea governor to be reappointed for a second consecutive term after chief of the central bank first doubled as chairperson of the Monetary Policy Board, which sets key interest rates, in 1998.
The reappointment is also positive in that his monetary policy expertise and network with foreign central bankers can be utilized further. His stronger roles and responsibilities are required to keep up the independence of the bank well.
He will face quite a number of tough tasks in his four-year second term set to begin next month. The most pressing one is the likelihood of US interest rates surpassing those in Korea.
Markets forecast the US Federal Open Market Committee to raise interest rates by 0.25 percentage points this month. Currently the US and Korean key rates are the same at 1.50 percent.
The next meeting of the Monetary Policy Board is scheduled for April, and the board is expected to raise the benchmark rate in April or May.
If US interest rates top those of Korea, capital outflow will be inevitable. If the US keeps raising interest rates, the BOK cannot sit idle, leaving its key rates unchanged.
However, enormous household debt is a big stumbling block. It stood at as much as 1,452 trillion won ($1.34 trillion) at the end of last year, up 8.1 percent from a year earlier. It snowballed largely due to borrowing costs being lowered to stimulate the economy. The 3.1 percent growth of the Korean economy last year is much attributable to an all-time low interest rate. The central bank cut its benchmark rate five times during Lee’s first term. It raised the rate to 1.5 percent last November, marking the first rate hike in more than six years.
Raising rates will increase interest burdens on households, sparking a bad cycle of shrinking consumption, slowing sales, reducing production and investment, and causing job losses.
Imminent industrial restructuring in shipbuilding and other fields is one of the factors that make the central bank hesitate to raise interest rates.
Thus, it will be one of Lee’s important responsibilities in his second term to work out ways to manage the impacts of rate rises on the economy. In-depth analysis of various economic conditions is required to decide on the timing and scope of interest rate hike.
Risks from outside, such as GM’s decision to shut down a factory in Korea and the rising US trade protectionism, should be taken into account. They are complicating domestic economic conditions. Market signals from home and abroad need be interpreted precisely.
The Bank of Korea must also try to keep a balance between its cooperation with the government and its independence from the government. The central bank ought to be able to put a brake on the government when the latter tries to control the former over monetary policies and tell the government the hard truths when it pushes economically unreasonable policies.
This does not mean Lee must act dogmatically under the pretext of independence, though.
Central bankers around the world tend to consult the government closely. In 2008 when a financial crisis hit the world economy, Lee, then deputy governor of the BOK, worked closely with Finance Minister Kim Dong-yeon, then presidential secretary for economy and finance. The central banker may well develop experience in keeping up smooth communication with the government.
A steady interaction with markets is a must-do for him to read their signals correctly. He must not neglect communicating with markets.
Externally, he should try to keep the independence of the central bank from a political influence, while pushing its organizational reform continuously to prevent it from becoming stagnant and complacent.