[Reporter’s Notebook] Bank of Korea Must Move Beyond Mechanical Independence

The Independence of the Central Bank, Once Considered Inviolable
Governor Lee Chang-yong Defends Acting Prime Minister Choi Sang-mok,
Unhesitant in Making Political Statements
When Mechanical Independence Brings Side Effects...
Cooperation with Fiscal Authorities Is Needed

"The Bank of Korea's monetary and credit policy should be formulated neutrally, executed autonomously, and its independence must be respected."

This is Article 3 of the Bank of Korea Act concerning the independence of the central bank. Independence is a fundamental principle for a central bank. Perhaps because of this, the Bank of Korea has earned the nickname "Haneonsa (Temple of the Bank of Korea)," implying that it quietly maintains silence like a temple, refraining from actively criticizing government policies.

The change began in April 2022, after Governor Lee Chang-yong took office. Governor Lee attracted attention with his distinctive outspoken manner. He made unexpected remarks beyond prepared answers at official events, causing Bank of Korea staff to break into cold sweat. Since his inauguration, he has consistently emphasized that "the Bank of Korea should not merely do what it must," advocating for a "noisy Bank of Korea" that raises its voice on issues surrounding the Korean economy.

He did not hesitate to make political statements either. On the 2nd, while reading his New Year's address, Governor Lee publicly defended Acting Prime Minister Choi Sang-mok’s appointment as a Constitutional Court justice, saying, "Several executives told me not to speak, but as I read, I could not help but say a word," and added, "When criticizing Acting Prime Minister Choi, it would be better to also consider what would happen to our economy if he had not acted as he did." Some criticized whether it was appropriate for the governor, who had said that the economy and politics would operate independently, to make political remarks at an official event, and even suggested that the governor might have political ambitions.

There has been much controversy over whether political remarks by a central bank governor are appropriate, but it is clear that the economic situation surrounding Korea this year is not easy. The won-dollar exchange rate is on the verge of surpassing 1,500 won, and concerns have been raised that Korea’s economic growth rate this year will be in the 1% range. Many experts see urgent need for policy coordination that simultaneously implements a supplementary budget and lowers the base interest rate to stimulate the economy. In this context, it seems reasonable for the head of monetary policy to support the head of fiscal policy for smooth economic policy operation.

On the contrary, the mechanical independence of the central bank, which withholds comments on various issues, may cause side effects. In times of crisis, active cooperation with fiscal authorities is necessary to revive the economy. The Bank of Japan (BOJ) is identified as a major party responsible for the prolonged stagnation after the bubble burst in the early 1990s, as it implemented financial tightening policies contrary to the government’s economic stimulus measures. Experts suggest that Korea may also face a prolonged recession similar to Japan. Article 4 of the Bank of Korea Act includes a provision on "coordination with government policies," stating that the Bank of Korea’s monetary policy should harmonize with government economic policies as long as it does not undermine price stability. Now, the Bank of Korea must flexibly apply the principle of independence and respond to new demands of the times.