By Oh Young-jin
Assistant managing editor
It is as easy as it is hard to criticize a central bank head over a key rate policy.
First, up or down changes as well as rate freezes often have such an encompassing effect on the macro-economy that it is difficult to determine with certainty whether a given decision is right or wrong.
There are so many conflicting interests in the market that any action can often be welcomed by one party but opposed by others.
Even in this extenuating set of standards, Bank of Korea (BOK) Governor Kim Choong-soo has few allies following the Feb. 9 decision to keep the key rate unchanged at 3.25 percent for the eighth straight month.
Criticism against Kim comes on three accounts, with two of them being the consequence of one fundamental cause.
The two consequential criticisms are his failure to act in timely fashion against inflation and a loss of credibility in the market.
Much of last year saw inflation galloping in the 4-percent range.
Despite repeated hints at a rate hike, Kim sat on his hands.
The results were dismal.
Inflation has put a stranglehold on household economies. First, they have had to spend more than before on buying the same amount of goods. Ask any grocery-buying housewife and chances are that they say they are scared by the rising prices of daily necessities.
It’s been a while since household debt emerged as a ticking time bomb that threatens the national economy.
The so-called “house poor,” who own houses bought with mortgages, are being pressed by interest payments they now have to make with reduced disposable income due to high inflation.
The return of the year-on-year inflation in January to the 3-percent range can’t be taken as any consolation because of volatility typical of an election year. A general election to select lawmakers is scheduled for April and there will be a presidential poll in December.
Now, Kim is left with little room to tweak the rate because the economy is showing signs of slowing down. In January, trade surpluses went into minus territory, with a red light flashing on the economic outlook. Perennial surpluses have served as a bulwark for Korea Inc. to keep afloat despite weak economies in Europe and the United States.
Despite an outlook for a better February, Kim’s BOK will not be able to take action any time soon. Already, forecasts for a rate freeze until the end of the first half of the year are widespread.
An increasing likelihood is that these predictions will prove accurate.
Kim only has himself to blame because he wasted chances to act, and now market players see through his central bank as if it were glass.
This means the BOK is deprived of a key tool to control the markets and, in a worst-case scenario, could find itself defenseless against challenges by market players.
Plus, Kim has repeatedly hinted at a rate hike and then didn’t translate his words into action, which has caused a credibility problem for the central bank.
Then, why has Kim’s BOK reached this low point?
It is not because of his qualifications. He graduated from the best schools and was regarded as a genius while attending a premium high school. He also served as head of the state-affiliated Korea Development Institute in its prime and worked as senior presidential secretary for economic affairs at the start of the Lee Myung-bak administration.
But his problem is that he views the central bank as a government subsidiary. Since being appointed to his current job two years ago, he openly said things that have indicated the BOK must play a role of supporting the government and came under fire for cozying up to the Ministry of Strategy and Finance.
His views and subsequent actions run counter to the notion that the independence of a central bank should be respected because if the government is allowed to use the central bank as its tool it is bound to bring about distortions in the normal functioning of the economy.
Kim’s BOK has failed to provide a set of checks and balances for the government that has been growth-oriented, contributing to the current dire situation that growth is becoming slower with the unreduced risk of inflation.
Can Kim change his style and seek a more independent role for the BOK?
It’s unlikely. Besides, his supportive tendency will likely make him attractive to a new government that will prefer, as its predecessors, a cooperative central bank head rather than an independent-minded BOK governor. But for the economy, central bank heads like Kim may not be an ideal choice because he would fit better working for the finance ministry.