Don’t let the central banker raise his voice

He and the government should mean it if they do not want the head of the central bank to raise his voice beyond his jurisdiction.

Cho Min-geunThe author is the business and industry news director of the JoongAng Ilbo. The central bank uses two primary weapons for monetary policy. One is the base rate, and the other is the mouth. As the rate adjustment can have an immediate — and massive — impact on the economy, the weapon cannot be used each time. So, the mouth — or the messages from the chief of the central bank — complements the indiscriminate effect of the first weapon. The messages serve as a kind of precision-strike missile to help adjust the expectations of the market. But verbal intervention to move the market requires acute dexterity.

Even the slightest change in the tone can cause tantrums in the market. The Bank of Korea (BOK) governor also knows well how to use the second weapon. He refrains from making assertive expressions and emotional connotations. His comments rarely veer away from the central bank’s jurisdictions devoted to interest rate, prices and foreign exchange rate. Since the bank cherishes political independence, mentions beyond their boundary are tabooed for central bankers. That could be self-chosen honorable isolation.

But BOK Gov. Rhee Chang-yong took a drastic departure from the routine during the press conference after making a policy rate decision last month. His remarks were direct and stretched beyond the traditional boundary of the central bank. When asked about the possibility of prolonged slow growth, he pointedly said, “We’ve already entered the long-term low-growth structure.” He was saying that the economy underperforming its potential growth is not a possibility but a reality.

He went on to lecture on the need for structural reform for five minutes. For Korea to break out of secular stagnation, it must undergo structural reforms in the pension, labor and education areas, as preached by the Yoon Suk Yeol administration. “What is frustrating is that we know the need for reform, but there is no progress due to the difficulty in reaching a compromise among stakeholders and because of discussions focused on the supply side, not the demand side,” he said. “Because of the impasse [in reforms], we turn to easier solutions such as fiscal expansion or the rate cut. These measures are a shortcut to a doomed future of the country.”

Rhee is a skilled orator. His comment could not have been impromptu. He would have sought advice and fine-tuned his words. In short, it was intentional.

Bank of Korea Gov. Rhee Chang-yong speaks at a press conference after a Monetary Policy Committee meeting at the headquarters of the central bank in Seoul, May 25. [JOINT PRESS CORPS]

Why the overstretch? Ironically, he likely wanted to reaffirm the limitations of the monetary policy. The BOK has cut this year’s growth rate estimate to 1.4 percent. When the central bank lowers the estimate for economic growth, the market usually expects an easing of the monetary policy to help the economy recover.

Moreover, the parliamentary elections are due in April next year. Policymakers could be tempted or pressured to ease fiscal and monetary policy to stimulate the economy. The market bets on a rate cut within the year regardless of repeated denials by Rhee. By highlighting the secular stagnation danger, he made it clear that there is a limit to solving economic problems simply through rate adjustments. He was sending a rude awakening to the market that is used to liquidity easing in troubled times while making a defense stand for the central bank at the same time.

Nevertheless, Rhee watched his words. He shopped short of directly mentioning the hurdles to structural reform — vested interests, in other words — because such a comment could be deemed political. Instead, he used general expressions such as supply-side-led reform discussions and the difficulty of social compromise.

He may have wondered if he had to go into detail that much. Everyone knows that the urgent reforms in the education, labor and pension fronts, as well as in the liberalization of medical, legal, real estate and other services sectors, are all stalemated due to the opposition by the mainstream interest groups. Politicians who merely chase votes and complacent bureaucrats help defend their fortress. Under such rigidity, innovations that can strengthen the country’s growth potential are killed before they can blossom.

The demise of the van-sharing service Tada is the primary example. The highly popular service went extinct in the face of vehement opposition from the jealous taxi industry, cowardly bipartisanship and negligence by the government. Executives of the platform operator were found not guilty of breaking the law in the Supreme Court. But the harm has already been done. Three years past the Tada’s exit, the passenger cab transport service remains unsatisfactory, and cab drivers have moved to delivery jobs and others for better income. It won’t be a surprise if the legislature suddenly enacts an anti-artificial intelligence law, the start-up industry complains.

During a workshop among ruling party executives and senior government officials, Lee Kwan-sup, senior presidential secretary for policy and planning, said that the government must push ahead with reforms for the country’s future even if the move can cost votes. He and the government should mean it if they do not want the head of the central bank to raise his voice beyond his jurisdiction.