[BOK Focus] "If More MPC Members' Views Are Disclosed..." Key Considerations for BOK's Introduction of Dot Plots

Monetary Policy Committee Considers Extending Outlook Horizon from Three Months to One Year and Introducing Dot Plot
Greater Predictability for Monetary Policy... Ability to Communicate Upside and Downside Risks in Rate Outlook
However, Wider Dot Pl

"Among the six Monetary Policy Committee members, excluding myself, three believed it is highly likely that the interest rate would be maintained at the 2.5% level even after three months, while the other three expressed the view that the possibility of a rate cut to a level lower than the current rate should remain open. I would like to emphasize once again that all of these opinions are conditional forecasts based on the economic situation."

This is the 'conditional base rate outlook for the next three months (forward guidance) of the Monetary Policy Committee members' announced by Lee Chang-yong, Governor of the Bank of Korea, after the Monetary Policy Board meeting on policy direction held on November 27. The Bank of Korea is considering extending the forecast horizon from the current three months to up to one year, and introducing a dot plot that presents two to three rate projections per committee member.This would provide more insight into each member's perspective on rate decisions, but the Bank of Korea is weighing the implications of such changes carefully. Why is that?

Lee Chang-yong, Governor of the Bank of Korea, delivers a welcoming speech at the '2025 Bank of Korea Monetary Policy Conference' held at the Bank of Korea in Jung-gu, Seoul, on the afternoon of the 15th. Bank of Korea

Three-Month Rate Outlook Introduced, but "Horizon Is Short and Specific Rate Levels Remain Unclear"

The Bank of Korea has gradually strengthened policy communication as forward guidance-explicitly providing information on the future policy direction-has become a core tool of monetary policy. Since October 2022, the Bank has shifted from qualitative policy direction to quantitatively presenting each committee member's three-month rate outlook. This has been evaluated as helping to shape market expectations for the base rate and reduce volatility in market interest rates. Kim Byung-guk, Head of the Policy Planning Team of the Monetary Policy Department at the Bank of Korea, explained at the 'Monetary Policy Conference' held on the 15th, "Unexpected changes in the three-month rate outlook have had a significant impact on changes in market expectations for the base rate, and the magnitude of this impact was similar to that observed in major countries such as Norway and the United States." The analysis shows that the three-month rate outlook has influenced the formation of market expectations for the base rate and significantly reduced volatility in short-term market rates on the day of monetary policy decisions.

However, there is still room for improvement, particularly because the forecast horizon of three months is short compared to economic outlook horizons. Kim noted, "This partially reflects the characteristics of a small open economy that is sensitive to external shocks," but also pointed out, "There may be difficulties in conveying a medium- to long-term policy stance that corresponds to changes in the economic outlook." He added that the effect on long-term market rates, which have a more direct impact on the real economy, may also be limited. In terms of presentation, the Bank currently only indicates the 'possibility' of future rate changes rather than specifying concrete rate levels. This contrasts with the U.S. Federal Reserve, which provides a dot plot of FOMC participants' projections, offering a clearer outlook for interest rates.

More Information vs. Greater Confusion with Expanded Distribution

In response, the Bank of Korea has been conducting simulations of conditional rate forecasts since July last year. In terms of presentation, it is testing a dot plot method that can visually display the level and distribution of rate forecasts. Previously, only the direction of possible changes was shown, but now each committee member (excluding the governor) would present two to three dots, reflecting both upside and downside risks to the outlook. For example, if the six committee members each present three dots, a total of 18 dots would reflect uncertainty, and the distribution visually shows the range of views and the risks to policy conditions. The Bank is also testing extending the forecast horizon to up to one year. This is aimed at enhancing the linkage with economic forecasts and providing medium- to long-term rate projections.

The main benefit of this approach is that it can enhance the predictability of monetary policy. Kim stated, "By extending the forecast horizon, we can more effectively manage medium- to long-term expectations," and "By presenting multiple projections, we can communicate both the upside and downside risks to the rate outlook, as well as the uncertainty in policy conditions."

However, if the distribution of dots is expanded, it could actually cause more confusion in the outlook. There is also concern about discrepancies between the actual base rate decision and the projections. According to a survey conducted by the Bank of Korea, economic agents expressed both expectations and concerns. While 83.9% agreed on the need to extend the forecast horizon, 72.0% expressed concern about the possibility of a widening gap between actual decisions and projections. In particular, 57.3% had a negative view of significant differences between actual policy decisions and forward guidance, even if the guidance is conditional.

'Monetary Policy Navigation'-The Ultimate Goal Is to Enhance Predictability Based on Transparency

The core issue the Bank of Korea is considering regarding the extension of the forecast horizon and introduction of the dot plot is 'How far ahead and in how much detail should a car's navigation system show the route to ensure the safest arrival at the destination?' If the view is too short, it does not provide enough guidance; on the other hand, uncertain information about the distant future could cause confusion.

Sung-Hwan Shin, a member of the Monetary Policy Committee of the Bank of Korea, is delivering the keynote speech at the "2025 Bank of Korea Monetary Policy Conference" held at the Bank of Korea in Jung-gu, Seoul, on the afternoon of the 15th. Bank of Korea

In this regard, there is active discussion within the Monetary Policy Committee about the specific approach. Shin Sung-hwan, a committee member, emphasized at the Monetary Policy Conference, "If there is a divergence between the actual path and the projections, policy credibility could be undermined, so a cautious approach is necessary. In particular, in an environment where frequent errors in economic forecasts occur due to external uncertainties, it is essential for the market to understand that forward guidance is 'conditional'." Previously, committee member Kim Jonghwa stated, "If it is difficult for committee members to reach consensus, we could first consider including specific rate levels in the current three-month forward guidance." Committee member Hwang Geonil has expressed a preference for a dot plot approach in which each member presents three dots over a one-year horizon.

At the conference, a variety of external perspectives from academia and the market were also presented. Park Woong-yong, professor at Seoul National University's Department of Economics, mentioned, "It would be beneficial to collect more data on periods of policy stance shifts and conduct additional case studies and qualitative analyses." Park Seok-gil, head of JP Morgan Korea, pointed out that providing more information does not necessarily make it easier for market participants to predict outcomes, and said, "(With changes such as extending the forecast horizon and introducing a dot plot) I hope an adaptation period will be provided by overlapping the current three-month forward guidance with the new approach."

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