[Inside Chodong] Currency War

Bank of Korea Main Building Lobby

[Asia Economy Reporter Seo So-jeong] "Price Stability." This phrase is engraved on a marble plaque hanging in the lobby of the Bank of Korea’s main building in Jung-gu, Seoul. Although the Bank of Korea is temporarily relocated to the Samsung Main Building due to remodeling, the large inscription right at the lobby entrance represents the very reason for the Bank’s existence. An executive who served at the Bank for several years recalled, "Every time I saw the plaque, a strange sense of mission welled up inside me."

As countries that had injected money to respond to COVID-19 are now facing the backlash of inflation, central banks worldwide are grappling with difficult decisions. The Ukraine crisis has further fueled inflation, prompting many countries to actively raise interest rates.

South Korea is no exception. The Bank of Korea, which preemptively raised its benchmark interest rate starting in August last year ahead of the U.S. Federal Reserve’s (Fed) rate hikes, raised the rate to 1.25% in January this year and then paused. However, as the Fed’s rate hikes have intensified, the Bank is preparing to raise rates again. To make matters worse, the U.S. Fed has hinted at consecutive ‘big steps’ (0.5 percentage point hikes at once) to curb soaring inflation, accelerating the tightening schedules of central banks worldwide.

During this critical period of battling high inflation, the Bank of Korea is busy preparing to welcome its next governor. Governor Lee Ju-yeol, who has led domestic monetary policy for the past eight years, ended his term on this day, but the baton handover did not happen immediately. Due to the change in administration, the nomination of the next governor was delayed beyond initial expectations, and conflicts between the old and new factions over personnel have ignited. There is even a possibility of an unprecedented situation where the Monetary Policy Committee, which decides the benchmark interest rate on the 14th of next month, will convene without a governor, as the nominee’s confirmation hearing schedule must still be completed. This raises concerns amid rapidly changing and increasingly uncertain domestic and international economic environments.

Seeming to be aware of this atmosphere, Lee Chang-yong, the Bank of Korea governor nominee, expressed upon returning to Korea, "Personally, it is an immense honor, but I feel a heavy responsibility as I may be entrusted with a crucial role amid rapidly changing global economic conditions." Arriving at Incheon International Airport on the 30th, Lee responded to reporters’ questions about monetary policy direction by saying, "Monetary policy decisions are not easy due to the realization of three risks: U.S. monetary policy normalization, the Ukraine crisis, and China’s economic slowdown." In a report published during his tenure at the International Monetary Fund (IMF), he noted that if these three risks materialize, policy decisions would be difficult. Now that all three have come to pass, even greater prudence is required in monetary policy decisions.

In particular, the Bank of Korea’s decision to hold rates steady in February was based on the assumption that the Ukraine crisis would not escalate into a full-scale war, so the Bank now faces the challenge of formulating policies after more closely examining the domestic economic impact of changes. Some market observers speculate that since Lee mentioned ‘growth’ before price and financial stability in his initial nomination remarks, he might prioritize the economy and refrain from raising benchmark interest rates prematurely. Given Lee’s usual concerns about South Korea’s structural growth potential weakening, his appointment could lead to relatively more emphasis on growth and a weaker preference for monetary tightening.

As the global economy rapidly implements monetary policies, a silent monetary war is underway. The Bank of Korea’s delicate coordination of monetary policy, balancing goals such as price stability and economic recovery, is more important than ever.