Ahead of Quarterly Economic Outlook, BOK's Monetary Policy Effectiveness on the Rise? [BOK Focus]

On the 11th of last month, the Monetary Policy Direction Decision Meeting of the Bank of Korea's Monetary Policy Committee was held at the Bank of Korea headquarters in Jung-gu, Seoul. Photo by Joint Press Corps

The Bank of Korea has attracted attention as it subdivides its economic outlook for South Korea from semiannual to quarterly starting this month, raising expectations that the impact of future monetary policy could increase. The Bank of Korea anticipates strengthening the effectiveness of monetary policy, improving economic forecasting capabilities, and enhancing transparency in monetary policy.

According to the Bank of Korea on the 16th, the economic outlook for August, to be announced on the 22nd, will forecast South Korea's gross domestic product (GDP) growth rate, consumer price inflation, current account balance, and other indicators on a quarterly basis. Previously, forecasts were announced as figures for the first half and second half of the year, but from this month, they will be broken down into figures for the 1st quarter, 2nd quarter, 3rd quarter, and 4th quarter. This is the first time the Bank of Korea has announced its economic outlook on a quarterly basis.

The quarterly economic outlook reflects the determination of Bank of Korea Governor Lee Chang-yong to enhance the impact and transparency of monetary policy. Since his inauguration in 2022, Governor Lee has increased the effectiveness of monetary policy and strengthened communication with the market by disclosing the Monetary Policy Committee members’ forward guidance on the base interest rate for the next three months. This time, quarterly forecasts are being introduced. Quarterly forecasts are also a condition for making the Monetary Policy Committee members’ forward guidance policy more sophisticated. Many advanced central banks, including those in the United States and Europe, already disclose quarterly forecasts.

The Bank of Korea expects that the quarterly economic outlook will improve the transparency of South Korea’s monetary policy. Currently, South Korea’s monetary policy transparency level is similar to Japan’s but slightly below that of major advanced countries such as the United States and Europe. With the release of quarterly economic forecasts, transparency is expected to rise to the level of advanced countries.

Through the subdivision of economic forecasts, the Bank of Korea’s key departments such as the Research Department, Economic Modeling Office, and Monetary Policy Department are also expected to expand their research and analytical capabilities. The subdivision of forecasts will enable more diverse communication with other research institutions and scholars, which is expected to strengthen the Bank of Korea’s research capabilities in the process.

However, the Bank of Korea’s burden regarding forecast errors is expected to increase. As a small open economy, South Korea is highly vulnerable to external variables such as international oil prices and wars, making precise economic forecasting difficult?a point that has been consistently raised. In fact, South Korea’s economic growth rate in the first quarter was 1.3%, a figure that greatly exceeded both the Bank of Korea’s and the market’s forecasts. This significant difference between the Bank of Korea’s forecast and the actual result sparked controversy in the market.

Despite such forecasting uncertainties, the Bank of Korea’s decision to subdivide forecasts is based on the judgment that quarterly economic forecasts will allow economic agents to understand changes in the central bank’s monetary policy more systematically, ultimately resulting in more benefits than drawbacks.

Governor Lee said earlier this year, “When economic forecasts are published in detail, concerns about forecast errors may increase as domestic and international uncertainties rise,” but added, “Economic agents will better understand the assumptions behind the central bank’s forecasts, enabling them to systematically predict the direction of policy changes according to changing conditions.” He explained, “Since the correct formation of expectations by economic agents is most important to enhance the effectiveness of monetary policy, I judged that it is desirable to boldly take one step further.”

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