Next Bank of Korea governor faces global financial uncertainties

Bank of Korea governor-nominee Rhee Chang-yong / Courtesy of Bank of Korea

By Lee Min-hyung

Bank of Korea (BOK) governor-nominee Rhee Chang-yong should place top priority on minimizing the financial imbalance and ensuring economic stability here, as the latest indices show the economy is still vulnerable to global financial uncertainties induced by the U.S. Federal Reserve's recent rate hikes, economists said, Tuesday.

Rhee will take office as the head of the central bank if he passes a National Assembly confirmation hearing as early as April. Reflecting on his recent remarks which contain a balanced monetary vision, he is not considered as being either hawkish or dovish.

Even if he underscored the importance of taming rising inflation and ensuring economic growth at the same time, experts are calling on the central bank to focus on maintaining economic stability from possible external financial shocks.

“The top priority should be on maintaining the stability of the local economy amid looming fears of a global financial shock at a time when the Fed enters a cycle of monetary tightening,” Kim Dae-jong, professor of business administration at Sejong University, said.

The expert's remark came after Rhee sent a message to reporters before leaving Washington, D.C. for Seoul for a confirmation hearing. He said that external risks, such as the U.S. credit tightening and Russia-Ukraine war pose risks to the Korean economy, adding that he will seek to conduct monetary policy in a balanced manner by taking into consideration growth, inflation and financial stability.

The U.S. monetary authority raised its base rate by 25 basis points to 0.5 percent this month, which is the first hike since 2018. The Fed also displayed its willingness to keep raising the rate throughout this year amid growing inflationary pressure. Given its hawkish rhetoric, the market expects the Fed to raise the benchmark rate to more than 2 percent by the end of 2022.

With the Fed hinting at aggressive rate hikes, the won-dollar exchange rate has been on a steep rise for the past few months. As the U.S. authority speeds up its monetary tightening, there is a possibility that Korea's local currency will weaken further against the U.S. dollar.

This will make the Korean economy more vulnerable to external financial shocks, as the nation's foreign exchange reserve-to-GDP ratio falls far below that of major Asian economies, according to the economist.

“Korea's foreign exchange reserve-to-GDP ratio came in at 28 percent as of January 2022, which is much lower than that of Hong Kong or Singapore whose figures top 100 percent,” Kim said.

“With the Fed ending its accommodative monetary policy, there stands a growing possibility that a kind of the 2008 global financial crisis will happen again. In that event, the Korean economy will be hit harder by external shocks than those that hold more foreign exchange reserves.”

Rhee also pledged to focus on risk management if he takes office due to multiple external uncertainties.

“It is hard for us to figure out how seriously the external risks ― such as the Fed's monetary normalization and the outbreak of war in Ukraine ― will impact the economy here in the short run,” Rhee told reporters Monday before leaving Washington, D.C.

The nominee arrives in Korea on Wednesday.