BOK chief sinking deep into credibility crisis
In his two years as the country’s top central banker, Kim Choong-soo claims the Bank of Korea (BOK) has become a more decisive and effective organization that is able to read the economy more accurately and pull its weight in international policy. This simply affirms his reputation as a policymaker who says the silliest things.
The bank’s main challenge is inflation, at least according to the huge scroll mounted in its lobby that reads “price stability.’’ And this is precisely the area where Kim now stands accused of losing the plot, aggravating the damage to savings and spending capabilities, and pushing the bank into the depths of a credibility problem.
Submerged in deafening criticism, Kim remains unapologetic and expresses confidence he’s on track to do what he was brought in to do ― restore stability to money markets and navigate the economy out of the financial crisis.
To him, denial is obviously just a river in Egypt. The loss of public faith in the bank’s judgment and powers is hard now to ignore and may prove to be irrevocable.
Consumer price inflation was above expectations for the most part in 2011. And while the year-on-year growth in the consumer price index has inched below the BOK’s target of 4 percent in recent months, this has more to do with a base effect created by last year’s elevated levels.
Annual inflation was measured at 4 percent for the whole of 2011. The government in November last year jiggled the country’s basket of goods and services to calculate inflation rates to reflect the changing nature of shopping behavior and the influence of new technology. Under the content of the old official shopping basket, last year's inflation would have been measured at 4.4 percent.
The majority of families continue to suffer from an acute squeeze in living standards. Among the major items of consumption, only meat appears to be cheaper than it was last year as household bills for other food, energy, housing, utilities and transportation continue to rise. And the volatility in international crude oil prices raises concerns that inflation will peak again on higher fuel prices.
Korea can ill-afford to disregard the inflationary threat when the deterioration in family finances has reached dangerous levels. At around a quadrillion won, the consumer debt mountain matches an entire year’s gross domestic product (GDP). Stagnant income and high unemployment aren’t helping families either.
The country’s fight against inflation, however, will entirely rely on the government’s ability to bully companies and stall the increase in prices of their products and services. The BOK continues to be in a self-induced coma and having entirely lost its ability to influence markets.
Critics had called for the BOK to start raising interest rates meaningfully in 2010, when the country’s economy grew by more than 6 percent, and during the earlier months of 2011, when inflation first showed signs of being inexorable. But the bank continued to sit on its hands, claiming the recovery was too fragile to withstand an increase in borrowing costs.
Well, a clampdown on money supply is no longer an option, not after the eurozone debt crisis blew up and threatened to throw the global economy into further financial turmoil. The BOK’s rate setters have kept the policy rate at 3.25 percent for nine consecutive months and it’s widely expected that the streak will extend to 10 in April.
It’s ironic that the BOK has been rendered irrelevant at a time when Kim seems obsessed with acquiring it new powers and responsibilities. Since arriving as governor, Kim has been pushing for legislative changes that give the BOK more influence in banking supervision and government policy, in addition to its existing powers to set interest rates and manage money markets.
This perhaps provides an explanation to why Kim continues to put growth before inflation, spending more time talking about jobs and social policy than restoring price stability. In chasing those extra powers, all Kim really did was compromise the BOK’s presence as an independent monetary authority. The bank’s monetary credibility evaporated the moment the market began questioning its commitment to the inflation target.
Korea would be better off with a central banker who accepts that inflation, when left unaccounted for, could be as big a scourge as unemployment. Kim may have to learn this the hard way after missing the chance to nip the problem in the bud.
This is not to suggest that the BOK should have immediately raised interest rates to a normalized 4-5 percent when it could have as that would have been economic suicide. But it’s hard to deny that the bank failed to provide a signal when the market urgently needed one.
One thing Kim has done with conviction is to shake up the BOK’s organization, promoting a younger generation of officials, consolidating its departments and subdivisions, and marginalizing the roles of deputy governors. He also provided more senior positions to ``outside’’ experts, including his Korea Development Institute (KDI) alumni.
Through these reforms, Kim strengthened his control of his court. The problem is that most of the bank’s staff are discrediting him.
A poll by the BOK’s labor union on 1,450 employees last year showed nearly 90 percent of the respondents rating Kim’s job performance negatively. According to BOK sources, the union conducted a similar survey this year, but didn’t announce the result because it was basically identical to last year’s.