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Posted : 2011-05-01 00:08
Updated : 2011-05-01 00:08

Hawkish vs. dovish



BOK likely to continue taking baby steps toward normalization

By Kim Jae-kyoung

“Hawkish” and “dovish.” These two terms appear everywhere in financial news these days. It is now getting more fashionable to be “hawkish” for most central banks in the world, particularly in emerging economies.

There are growing signs that the Bank of Korea (BOK) is also turning more hawkish on monetary policy in line with the global trend, with inflation expectations rising fast due to high-flying oil prices and hikes in food costs.

There is no doubt that the BOK will move toward normalization by raising key interest rates but it is hard to forecast how fast it will tighten its monetary policy due to lingering economic uncertainties both at home and abroad.

There are a few ways of predicting the course of monetary policy. First, you can get a clue from the wording of BOK Governor Kim Choong-soo at a press conference following the interest rate-setting meeting every month.

Also, you can make a wild guess based on a wide range of economic data, including inflation, gross domestic product (GDP) and the movement of foreign exchange rates but this can be misleading because they often send mixed messages.

One good way that you can increase your accuracy is to take a good look into the monetary policy committee members’ orientation associated with the interest rate policy. You can get a medium-term picture if you have a good grasp of how many members are hawkish and how many dovish.

The seven-member monetary policy committee comprises of Chairman Kim (Governor) and five other colleagues ― Kim Dae-sik, Choi Do-soung, Kang Myung-hun, Lee Ju-yeol (Senior Deputy Governor) and Lim Seung-tae. The committee currently has only six attendees as President Lee Myung-bak has yet to fill the vacancy since former committee member Shim Hoon left in April last year.

Since the decision is made by a majority vote, interest rates are mostly set by a split decision. The committee holds an interest rate-setting meeting every month. For 10 months from last July to April, the rates were set by unanimous decision only three times.

The best way to understand each member’s stance is to check remarks they make during the meetings. Minutes of the meetings are recorded anonymously but anyone who clearly opposes the majority opinion gives his name.

To figure out which member is hawkish or dovish, BusinessFocus went over the minutes of meetings that have been made public so far. On Tuesday, the minutes of the meeting in March were revealed.

3 different camps

According to our analysis, three members’ names appeared on the minutes, and the six members were split into three different camps. Kim Dae-sik and Choi Do-soung were seen as hawkish, while Kang Myung-hun was considered dovish. Governor Kim and two others were deemed neutral.

Kim Dae-sik and Choi were strongly against majority decisions at a meeting in September and February where the committee kept the rates unchanged. At the time, they called for rate increases, saying that inflation fears could escalate if inflationary pressure was not contained properly.

At the October meeting, only Choi voted for a 25 basis point rate hike, while the rest agreed on a rate freeze. Choi then urged the central bank to normalize the rate as soon as possible, claiming that lower interest rates were generating more debt.

On the other hand, Kang is seen as extremely dovish, as he has never expressed views in favor of rate hikes since he began participating in the committee meetings in May 2008 except for the meeting in November.

Even at the July meeting in 2010 when the BOK started hiking rates from 2 percent to 2.25 percent for the first time since the global financial crisis, he stuck to his dovish stance, calling for a rate freeze

In March, committee members decided by a majority to raise the base rate by another 25 basis points. However, Kang expressed clear opposition to this decision, and argued that the rate should be kept at its current level as economic uncertainties were lingering and a rate hike can deal a blow to the real estate market.

Governor becomes 'neutral'

Governor Kim does not like being called dovish. But he has been regarded as such among market participants as he has sought to boost policy coordination with the government. “People call me dovish but I think I’m more prone to be hawkish,” said Kim at his first meeting with reporters after he took office on April 1 in 2010.

One year has passed since his inauguration and now he is considered more neutral than dovish due mainly to his cautious stance. “At the committee meetings, Governor Kim tends to listen to other members’ views first and express his opinion later,” a ranking BOK official said, asking not to be named.

His message to the market nowadays is also neither hawkish nor dovish. He often makes ambiguous comments, which make it impossible to make a clear forecast. For example, during a BOK-hosted seminar for reporters in September, Kim said, “When you turn on a signal for a right-hand turn while driving, it doesn’t necessarily mean that you make the turn at the next corner.”

Senior Deputy Governor Lee plays his role of reflecting the central bank’s view on the committee. Generally, his view is in line with Governor Kim’s. The youngest member Lim Seung-tae is seen as another neural policymaker because he usually follows a majority decision. But he unexpectedly opposed the rate hike in March.

Given that more committee members, including Governor Kim, remain cautious over fast monetary normalization, it is likely that the central bank will continue to take baby steps in the coming months by raising key rates every other month.

“I think as long as the BOK is normalizing policy it is neutral. I do not think the inflation problem is serious enough to warrant a more rapid pace of normalization,” ING Group senior economist Tim Condon told The Korea Times.

“I recently changed my rate hike forecast to only two more ― previously three ― and finishing in July at 3.5 percent. As unemployment retraces to the low 3 percent range the BOK can move into a tightening mode,” he added.

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