Seo Young-kyung, Member of the Monetary Policy Committee, "Conditional Forward Guidance Should Be Strengthened"

June 26 Bank of Korea Press Briefing

Seo Young-kyung, a member of the Monetary Policy Committee of the Bank of Korea, evaluated on the 26th that the forward guidance promoted by the Bank of Korea so far has shown meaningful effects. She also suggested the need to strengthen it.

At a press briefing titled "What Has the Pandemic Crisis Left Us?: Experiences and Challenges of Monetary Policy" held at the multipurpose conference hall of the Bank of Korea's integrated annex on the same day, Seo emphasized the importance of expectation management in situations with high uncertainty regarding future growth and inflation, highlighting the need to strengthen conditional quantitative communication such as forward guidance.

Forward guidance is when a central bank assesses the future economic situation and announces the future direction of monetary policy. The purpose is to minimize market confusion caused by changes in monetary policy by pre-announcing the central bank's monetary policy direction to the market.

Forward guidance is regarded as a "Korean-style dot plot." In fact, the U.S. Federal Reserve (Fed) records and discloses the federal funds rate projections of the Federal Open Market Committee members in a dot plot. Countries such as New Zealand, Sweden, and Norway also disclose forward guidance indicating interest rate paths.

Previously, since the inauguration of Governor Lee Chang-yong, the Bank of Korea has presented the distribution of Monetary Policy Committee members' policy rate forecasts within three months for a year and a half starting from October 2022.

At the briefing, Seo shared the effects of the forward guidance policy evaluated by applying the BIS (2022) methodology. According to this, the predictive power and responsiveness of the market regarding the three-month path of the policy rate in the forward guidance conducted by the Bank of Korea were similar to those of major advanced countries such as the U.S., which have implemented forward guidance for a long time.

Regarding forward guidance, Seo said, "Strengthening quantitative communication over the past year and a half is evaluated to have helped economic agents and market expectation management," adding, "It is necessary to consider ways to strengthen conditional quantitative communication related to the policy rate forecast horizon and presentation methods in the future."

She also positively evaluated the idea of extending the time horizon to six months or one year. Seo stated, "Looking at countries that have implemented forward guidance for a long time, it is natural that accuracy decreases and the distribution of deviations widens as the period lengthens," but added, "Even if situations arise where forecasts do not match, such as widening deviations, sufficient communication would help economic decision-making."

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