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Timely financial risk management takes priority: BOK's dovish rate-setter
Easing could precede full stabilization of surging home prices due to economic stagnation
Monetary policy board member of Bank of Korea (BOK) Shin Sung-hwan speaks during a press conference at the central bank, Wednesday. Courtesy of BOK
By Lee Kyung-min
The long-awaited monetary easing continues to be delayed, eclipsed by the more imminent need to contain the rapid buildup in household debt and housing prices since June, according to a dovish member of the central bank’s key rate-setting board, Wednesday.
According to Shin Sung-hwan, the easing cycle could have begun as early as May, as warranted by headline inflation tempered to the central bank’s target of 2 percent, combined with years of post-pandemic economic stagnation.
However, the policy stance has since been revisited, unsettled by four months of household leverage growth to the tune of trillions of won accompanied by steep price increases – a concern for financial stability, one of the central bank’s dual mandates alongside price stability.
“An early May cut or a June cut was an all-but-foregone conclusion, but a lot has changed since,” Shin said during a press conference at the central bank.
The continued restrictive policy rate of 3.5 percent was no longer necessary three months ago, in his view.
However, the seemingly steady rate dynamic took a complicated turn, disrupted by a spike in housing prices.
“We had to hit the brakes, so to speak, alarmed by the financial stability considerations emerging as a sudden significant risk factor.”
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The self-proclaimed micro data-oriented member of the board said the reach of monetary policy remains effective in the early stages of upward housing price volatility.
“Unlike the equity market, for example, the property market is defined by high predictability, a reason why an early anchoring of market expectations against a further price hike is critical.”
Underpinning the assessment is what he has formulated as a “momentum index,” a measure of price drivers underlying demand in the financial market.
The index compares the price growth rate at a certain date relative to the past 13 weeks of trend. The higher the figure, the more predictable the future price trajectory.
“The figure is three for the equity market, far lower than over 40 for the housing market," he said.
"This speaks volumes about how predictable the property market sentiment is, warranting an extension of the current monetary tightening. The early preemptive policy measure is crucial since prices tend to rocket even further, propelled by the uncontrollable collective fear of missing out.”
The dovish member said the pressure for expedited easing from the government and some state-run think tanks is understandable, but only to the extent that it does not interfere with the independence of the central bank.
“I am a well-known dove — monetarily speaking," he said. "A rate cut is a step long overdue, as far as I am concerned. The government is right to prioritize economic recovery to help revitalize the strained livelihoods of the public. It is our job to keep it in check for balanced growth."