Bank of Korea "Maintain Accommodative Monetary Policy Next Year... Prepare Measures to Strengthen Employment Stability Role"

2021 Monetary and Credit Policy Operational Directions

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] The Bank of Korea (BOK) stated that it will "prepare measures suitable for our country's situation" in response to demands to add 'employment stability' to its establishment objectives. Amid ongoing employment shocks caused by the COVID-19 pandemic, a bill to include employment goals in the Bank of Korea Act has been proposed in the National Assembly. The BOK plans to maintain its accommodative monetary policy stance next year as well.

On the 25th, the BOK announced in the '2021 Monetary and Credit Policy Operation Direction' that "regarding the demand to strengthen the BOK's role in employment stability, we will prepare measures suitable for our country's situation by referring to cases of major central banks and opinions of external experts."

The proposal to add 'employment stability' to the Bank of Korea Act emerged as the U.S. Federal Reserve (Fed) places greater emphasis on employment among its dual monetary policy goals of price stability and full employment. Given the severe employment impact of the COVID-19 crisis, there have been calls for the BOK to prioritize employment stability more than it currently does. The related amendment bills currently proposed in the National Assembly fall into three main categories. The bill primarily proposed by Ryu Seong-geol of the People Power Party aims to include employment goals in Article 1, Paragraph 1 of the Bank of Korea Act. Bills proposed by Kim Kyung-hyup and Park Kwang-on of the Democratic Party each seek to include employment goals in Article 1, Paragraph 2.

However, the BOK holds the view that further research is needed on how effectively employment stability goals can be achieved through monetary policy, the limitations of tools beyond the base interest rate to achieve employment stability, and potential conflicts between policy objectives. The BOK stated, "We will also review effective utilization methods of policy tools other than interest rates in preparation for the possibility of a deepening economic downturn."

While maintaining the current operation method of the price stability target system, the BOK said it will analyze the performance and limitations of the price stability target and study improvement measures by referring to discussions in major countries. The BOK's inflation target level is 2.0%.

The BOK plans to maintain an accommodative monetary policy stance next year. Although the domestic economy is expected to recover moderately, uncertainties remain high regarding the future growth path due to factors such as the spread of COVID-19 and the timing of vaccine commercialization.

The BOK stated, "While maintaining an accommodative monetary policy stance to support the recovery of growth momentum and stabilize inflation at the target level, we will pay closer attention to financial imbalance risks such as capital inflows into asset markets and increases in private credit under accommodative financial conditions."

Additionally, the BOK plans to efficiently operate its lending system to enhance the effectiveness of support for COVID-19-affected small and medium-sized enterprises (SMEs) and to devise measures to strengthen support for new growth sectors considering post-COVID-19 changes in conditions. The COVID-19 affected enterprise support program will be managed by reviewing the effects of increased limits and changes in funding conditions for vulnerable sectors. The financial intermediation support loans will also be analyzed for operational performance to improve support effectiveness.

To prepare for the post-COVID-19 era, the BOK will strengthen research and analysis related to economic and industrial structures, environment, and climate change. The BOK stated, "As changes in economic and industrial structures are expected due to intensified non-face-to-face and digitalization trends after COVID-19, we will enhance related analysis and study ways to improve the effectiveness of monetary policy." It added, "Along with analysis of structural factors such as demographic changes in our economy, we plan to strengthen research on the impact of environmental and climate change responses on our economy and monetary policy in the medium to long term."

Regarding market stabilization measures, the BOK emphasized, "We will promptly implement market stabilization measures as necessary to stabilize financial and foreign exchange markets," and "We will continue efforts to expand currency swap agreements with major central banks and improve liquidity adjustment tools such as monetary stabilization bonds to enhance the efficiency of open market operations."

Furthermore, the BOK stated, "While strengthening research and responses to innovations in the payment and settlement sector such as central bank digital currencies, we have decided to revise the system to more clearly establish the BOK's roles and responsibilities related to payment and settlement in the rapidly changing payment environment."

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