[Lee Chang-yong Administration BOK] Must Solve Inflation and Liquidity 'Complex Equation'... Policy Mix Challenge

Rising Inflation and Liquidity Crisis... Complex Equation to Solve
BoK and Government 'Policy Mix' More Important Than Ever
Challenge to Pursue Independent Monetary Policy Amid Political Pressure
Experts: "Did Well So Far, But Future Won't Be Easy"

Lee Chang-yong, Governor of the Bank of Korea, is explaining the interest rate hike at a press briefing held on the 12th of last month at the Bank of Korea in Jung-gu, Seoul. Photo by Joint Press Corps

As the crisis of high inflation and low growth intensifies, the government's and the Bank of Korea's 'policy mix' has become a hot topic. Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho and Bank of Korea Governor Lee Chang-yong have shown cooperation by advocating for a 'strengthened policy mix' since their early days in office. However, they have faced challenges amid inflation, export issues, and even liquidity crises. Marking 200 days in office, Governor Lee now faces the task of achieving the Bank of Korea's primary goal of price stability while also collaborating with the government to achieve growth and financial stability.

According to the financial sector and academia on the 4th, as major countries including the United States continue to raise interest rates, increasing uncertainty in financial markets, the importance of a policy mix that integrates government fiscal policy and central bank monetary policy is growing. Governor Lee and Deputy Prime Minister Choo have held a total of eight meetings (two breakfast meetings and six emergency macroeconomic and financial meetings) from May 16 to the day before, maintaining public policy consultations roughly once a month. Deputy Prime Minister Choo recently expressed trust by telling reporters, "Governor Lee and I think alike. There has not been a single conflict," and Governor Lee has also reinforced cooperation by expressing similar views whenever possible.

In fact, it is not easy for the Bank of Korea, which must raise interest rates to stabilize prices during a crisis, and the government, which must lead growth, to speak with one voice. The Lee Myung-bak administration, which experienced the 2008 financial crisis, is a clear example. At that time, as inflation surged and growth slowed, a power struggle ensued between the Bank of Korea and the Ministry of Economy and Finance. The ministry's vice minister exercised the right to attend the Monetary Policy Committee meetings monthly with speaking privileges, which led to opposition from the Bank of Korea's labor union. Although this right to attend does not have binding power, it is effectively used to pressure Monetary Policy Committee members to lower interest rates.

Deputy Prime Minister for Economy Choo Kyung-ho and Bank of Korea Governor Lee Chang-yong are attending the 'Emergency Macroeconomic and Financial Meeting' held on the 23rd at the Bankers' Hall in Jung-gu, Seoul, and are talking before the meeting begins. Photo by Yoon Dong-joo doso7@

Compared to the past, the relationship between Deputy Prime Minister Choo and Governor Lee is closer, but the problem is that despite these efforts, many economic indicators such as inflation, interest rates, and exchange rates continue to worsen. The inflation rate in October rose to 5.7%, expanding from the previous month, and the economy is expected to deteriorate further next year, making the Bank of Korea's monetary policy decisions more difficult than ever. In particular, the Bank of Korea faces a dilemma of maintaining a rate hike stance to stabilize prices while needing to supply liquidity to the bond market.

For Governor Lee, the challenge will be to pursue an 'independent monetary policy' free from increasing pressure from the government and National Assembly, amid slowing growth, rising household debt, and tightening liquidity in the bond market. In fact, on the 1st, Yoon Chang-hyun, a member of the People Power Party, said, "It is necessary to convey the Financial Services Commission's opinions, including the right to attend meetings, to the Bank of Korea," which the market interprets as the beginning of political pressure on the Bank of Korea.

Experts have evaluated that Governor Lee has performed relatively well in communication with the market and cooperation with the government over the past 200 days but foresee a challenging road ahead. Professor Kim Jin-il of Korea University’s Department of Economics, who previously worked as a senior economist at the U.S. Federal Reserve, said, "With the emergence of a liquidity crisis, the Bank of Korea is now in a very difficult situation, having to solve a complex equation. In the past, central banks only needed to stabilize prices, but after the financial crisis and the COVID-19 pandemic, they must consider not only prices but also the real economy, requiring a comprehensive response."