Kiyoung Park, Member of the Monetary Policy Committee, "Watching SVB and CS Shocks... Time to Adopt a New Framework"

"South Korea, Pivot Not Yet... Future Core Inflation Trends Important"

"We need to see how the shocks from the U.S. Silicon Valley Bank (SVB) and Switzerland's Credit Suisse (CS) will affect the benchmark interest rate decisions of the U.S. Federal Reserve (Fed) and the European Central Bank (ECB), but for now, we plan to consider them as major variables only under the impact on price stability and financial stability, which are the mandates of the Bank of Korea."

On the 16th, Park Ki-young, a member of the Monetary Policy Committee, stated this during a press conference held after his lecture on 'Monetary Policy Effects and Central Bank Communication' at the Bank of Korea's Samsung Main Building conference room. He said, "We need to observe further the ripple effects of the SVB and CS shocks on the domestic market."

Following the consecutive collapses of U.S. regional banks SVB and Signature Bank, the crisis spread to Credit Suisse, a global investment bank (IB) based in Switzerland, heightening financial market anxiety. Although U.S. authorities extinguished the immediate fire by guaranteeing all deposits, the global financial market is shaking as CS, ranked among the world's top nine IBs, is also engulfed in crisis rumors.

Park mentioned that the SVB and CS incidents could further complicate monetary policy decisions. He said, "If making monetary policy decisions over the past year and a half was like solving a fifth-degree equation, it feels like solving an eighth or ninth-degree equation in the past week," adding, "Now that the SVB incident has spread to the CS case, it seems necessary to monitor market conditions more closely."

Park pointed out, "When the SVB incident first occurred, it was hard to understand because it was a bank holding safe assets like government bonds and mortgage-backed securities (MBS) that failed. However, SVB, which converts short-term funds into long-term funds, did not hedge interest rates and failed to follow textbook practices. In the case of Signature Bank, there were comprehensive problems, including attempts to evade regulations through lobbying."

Park suggested that this incident indicates the need for a new regulatory framework. He said, "In the SVB bankruptcy case, the U.S. government swiftly implemented financial market stabilization measures such as full deposit protection, but we need to check whether we have institutional grounds to do the same in Korea," adding, "The U.S. Federal Deposit Insurance Corporation (FDIC) regulates by recovering compensation from insolvent financial institutions."

Regarding the impact of this incident on domestic monetary policy, Park said, "It is still uncertain how far the sparks from SVB and CS will spread," but "for now, we plan to consider them as major variables only under the impact on our mandate of price and financial stability."

As CS agreed to receive funding support of up to 50 billion Swiss francs (approximately 70.3 trillion KRW) from the Swiss National Bank to calm market anxiety, Park emphasized the need for central banks worldwide to clearly communicate the purpose of any policies they implement to reduce financial market instability. He said, "If central banks act as lenders of last resort, money and liquidity will temporarily increase, but once the situation is resolved, they must immediately restore the original state," adding, "It is important to communicate clearly to the market that these are not policies to inject liquidity."

In response to the recent spread of financial crisis concerns and the possibility of a pivot (a change in monetary policy direction) as Korea's inflation rate is expected to gradually slow, Park dismissed the idea, saying, "If the price stability target (2%) is firmly established, a pivot could be considered, but personally, I have never thought about a pivot." He particularly emphasized the need to closely monitor the trend of core inflation going forward.

Park said, "I think the inflation rate will slow significantly in March, but that is due to the base effect," adding, "It does not indicate that the trend has changed." He noted, "The drop in the Consumer Price Index (CPI) is good news, but we need to observe the data until March a bit more," and "Core inflation may be more important for the time being."

Furthermore, Park stressed, "Central banks' communication with the public, which has been increasingly active recently, mainly occurs through the media, so the role of the media is important." He said, "Media reports contain a lot of information closely related to economic decision-making and are influenced by the central bank's communication methods, so research on communication strategies suitable for Korea's circumstances in terms of monetary policy effectiveness is necessary."

He also mentioned the need for differentiated communication efforts depending on the audience for communication with the general public. He explained that the Bank of England (BOE) added descriptions understandable to non-experts (at a high school level) in its Inflation Report, which increased visitor numbers and improved policy understanding.

Regarding the evaluation of forward guidance since the appointment of Bank of Korea Governor Lee Chang-yong, Park said, "I think positively." He added, "Providing information from the perspective of necessity is the right direction, and although there was an initial attempt at verbal dot plots, it is necessary to consider ways to show more quantitative figures."

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