[Q&A] Bank of Korea: "Will Refer to Changes in US Fed, etc. for Monetary Policy Improvement"

Bank of Korea Announces 'Monetary and Credit Policy Report'

Park Jong-seok, Deputy Governor of the Bank of Korea, is speaking at the Monetary and Credit Policy Report (September 2020) briefing held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 10th.

[Asia Economy Reporter Eunbyeol Kim] As the U.S. Federal Reserve (Fed) announced the adoption of the Average Inflation Targeting (AIT) framework, the Bank of Korea also stated that it will review whether there are areas to improve in South Korea's monetary policy framework.

The AIT introduced by the Fed sets the monetary policy goal as "if inflation persistently remains below the 2% target, allowing inflation to moderately exceed 2% for a certain period." Recently, the Fed has maintained a near-zero policy rate in response to the COVID-19 pandemic, meaning that it is willing to tolerate inflation exceeding 2% in the short term. Since the low interest rate environment has lasted for a long time, the Fed plans to consider the average inflation over a considerable period before shifting to a tightening monetary policy. Additionally, the Fed is expected to emphasize employment in its monetary policy. Given the severe employment shock caused by COVID-19, it implies that accommodative monetary policy will continue until employment recovers.

On the 10th, Park Jong-seok, Deputy Governor of the Bank of Korea, said at a press briefing on the "Monetary and Credit Policy Report," "We have been observing various discussions on the Fed's policy changes," and added, "We will refer to the trends of the Fed and other major countries to see if there are areas to improve in our country's monetary policy framework."

Regarding the recent decline in the real policy rate reflecting inflation, he said, "While it can be assessed that the policy rate is close to the effective lower bound, it is difficult to say that all room has been exhausted," and added, "Depending on future economic conditions, it is possible to respond with rate adjustments if necessary." However, he also noted, "There are many other tools to utilize, such as lending policies and open market operations."

According to the Bank of Korea's Monetary and Credit Policy Report, the real policy rate calculated by subtracting core inflation (excluding food and energy) and expected inflation (general public, one-year horizon) from the nominal policy rate fell to 0.4% and -1.1%, respectively, as of the second quarter of 2020. The real long-term interest rate, calculated by subtracting expected inflation (three-year horizon) from the long-term market rate (3-year government bond), also dropped to -1.0% in the second quarter.

Below is a Q&A with Park Jong-seok, Deputy Governor of the Bank of Korea, and others.

- Could you provide your evaluation of the Fed's adoption of the Average Inflation Targeting?

▲ It appears to be an effort to secure more room for monetary policy in a low inflation and zero interest rate environment. The Bank of Korea has been monitoring the Fed's policy changes. However, since this is the Fed's first attempt, we need to observe the reactions and movements of other countries. It is difficult to say specifically how the Bank of Korea will act at this early stage. We will refer to other countries' trends to see if there are areas to improve in our monetary policy framework.

- The accommodative monetary policy stance is affecting asset markets. Is there a need for the Bank of Korea's own analysis of the real estate market?

▲ The real estate market is being analyzed internally by related departments such as the Research Department and the Financial Stability Department. I understand that model development, improvements, and stress tests are being partially conducted. If collaboration with external experts is needed, we will conduct analysis and review together with experts through external research projects.

- Why was the GDP gap rate omitted from the Monetary and Credit Policy Report?

▲ COVID-19 has caused cyclical changes in the economy, and the potential growth rate is also expected to be changing accordingly. Therefore, there is uncertainty regarding the GDP gap rate. Once the re-estimation of the potential growth rate is completed, we will be able to discuss it again.

= The real policy rate has decreased but is slightly higher than in 2018. Can it be seen as having room for additional rate cuts?

▲ Currently, while the policy rate can be assessed as being quite close to the effective lower bound, the room has not been fully exhausted. Additional easing policies can be implemented through rate adjustments if necessary depending on economic conditions. However, there are many other policy tools to utilize, such as lending policies and open market operations. Internally, we assess that the current policy rate level is sufficient to support recovery from the economic downturn.

This content was produced with the assistance of AI translation services.