By Kim Tong-hyung
Kim Choong-soo, the opinionated governor of the Bank of Korea (BOK), takes pride in his reputation as a straight talker and will assure you he has no stake in winning a popularity contest. That’s fortunate, because he definitely won’t be winning any.
Into his third year as the country’s top central banker, Kim continues to be a magnet for controversy and the heated conversations surrounding him are less debate than verbal assault.
Putting it bluntly, the main role of the central bank boils down to controlling inflation, stabilizing output and reading the economy. The BOK under Kim’s lead has so far been 0 for 3.
In a surprise decision earlier this month, BOK’s monetary policy committee shaved interest rates by 0.25 points to 3 percent, ending a 13-month freeze, as the country battles subduing economic activity and worsening global conditions. It lowered its gross domestic product (GDP) growth forecast for 2012 by 0.5 points to 3 percent the very next day, which doubled as a confession that things are worse than feared.
The rate cut had many observers throwing their hands up in embarrassment. A school of economists in previous years had called for BOK to show more urgency in returning interest rates to normalized levels of 4-5 percent to contain inflation and defuse the threat imposed by historically high household debt. The BOK had an obvious window in 2010 when the country’s economy grew by more than 6 percent, they claimed.
Nonetheless, Kim and his group of rate-setters continued to ice their trigger fingers, questioning whether the country’s recovery was robust enough to withstand a meaningful rise in borrowing costs. Well, clamping down on money supply is unthinkable in dismal 2012, when worsening global conditions and collapsed consumer spending have the economy panting on the ropes.
Critics argue that the BOK would have had more room to jolt the economy now if it had acted quicker to normalize interest rates earlier. Lowering an already-low policy rate of 3.5 percent to 3 percent hardly qualifies as a shot in the arm, they say.
``Second-guessing is always the easy part. That said, it would be hard to argue that BOK had acted with conviction in recent months and provided markets the signals it needed,’’ said a longtime BOK watcher.
``(Under Kim) we had never displayed a real commitment to controlling inflation and we haven’t been able to significantly influence financial markets in efforts to combat household debt and subduing economic activity.’’
It’s debatable whether the BOK’s lack of pace and purpose in monetary policy has something to do with its ability to forecast the economy accurately. While it took only three months for the bank to lower its growth estimate from 3.5 percent and 3 percent, the consensus of market watchers is that the latest forecast still isn’t low enough.
There is admission from within the BOK that it got the economy wrong, judging by the recently-released minutes from the monetary policy committee meeting in June.
A number of rate-setters were in agreement that the BOK underestimated the impact of the spiraling European financial crisis and that this eroded efficiency in monetary policy. The BOK doesn’t unveil the names of the monetary policy committee members when it releases the minutes.
``The BOK had based its economic forecast that the eurozone financial crisis would stabilize during the first-half of the year, as stated by the prediction of `low first-half, high second-half’ in economic activity. However, it now seems clear that the eurozone crisis will not be arriving at a closure for a considerable time and the financial precariousness of the involved countries could spread to other countries quickly at any moment,’’ said one rate-setter.
``We must study the impact of the rising uncertainty more closely; how it changes the sentiment of economic actors and how all these will affect the real economy. These are the types of analysis that should be included when making growth forecasts,’’ said another.
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 over his court. The problem is that most of the bank’s staff are discrediting him. And while Kim loves to describe himself as a man who shoots from the hip, he clearly doesn’t have the thick skin of a pro-wrestler who will cup his ears to encourage the boos.
Kim came under fire recently after it was unveiled that the BOK recently consulted with a law firm on whether it could punish an employee who had left scathing remarks about Kim’s personnel decisions on the bank’s internal website. Obviously, the BOK’s labor union is steaming over Kim. And even Yoo Seong-geol, former deputy finance minister and now lawmaker of the ruling Saenuri Party, blasted Kim for the incident in a recent parliamentary hearing.
``This was an incident that BOK should have managed to handle internally,’’ he told Kim.