SEOUL: South Korea's incoming central bank governor on Wednesday stressed the need for strengthened independence from the government and clear communication with markets, the lack of which has seen the bank broadly criticised.
"It is an important goal (that the central bank) keep its neutrality from (government bureaus) involved in financial policies," nominee governor Lee Ju-yeol said at a parliamentary confirmation hearing. Lee, who has had 35 years of experience at the Bank of Korea, noted the central bank's communication issues with financial markets, pointing out the bank's surprise decision to cut rates in May last year.
"The central bank lost its trust from markets once market participants felt the Bank of Korea was not acting on its promises," he said.
Outgoing Governor Kim Choong-soo, who was a close aide of former President Lee Myung-bak and had no previous work experience at the central bank, has been criticised for giving in too easily to pressure from the government.
Kim raised the policy interest rate by 125 basis points between July 2010 and June 2011, while cutting it by 75 basis points between July 2012 and May 2013.
He was criticised for being too slow when raising it and too slow when cutting it. Wednesday's hearing is the first of its kind to examine a Bank of Korea governor-nominee, and although it does not have the right to cancel the presidential nomination it can sway public opinion.
INDEPENDENCE, HARMONY
The president's Blue House has regularly held meetings with the central bank governor in the past, which investors and analysts believe may have swayed or even pressured the Bank of Korea's monetary policy decisions.
Lee said he would selectively attend meetings there based on the relevance of the agenda to the central bank's policies.
Little is known of his voting record at the Bank of Korea, but Lee is widely perceived to be more assertive in upholding the orthodox central bank policy stance of focusing on curbing inflation.
The nominee also stressed the importance of cooperation with the government and the need for coordination to heighten policy effectiveness while maintaining the central bank's independence.
"When deciding on monetary policy I plan to keep the balance between keeping stability in inflation, financial stability and growth, as the law states."
Lee is expected to chair his first monthly policy meeting on April 10, with a follow-up news conference that day potentially providing more clues to his policy stance.
HIKE NEXT MOVE
A Reuters poll conducted ahead of the March 13 policy meeting showed analysts have priced in a slightly higher chance of an interest rate increase during this year since Lee's nomination, which was announced on March 3.
South Korea's economy, the fourth-largest in Asia, has been on a solid recovery track and inflation is expected to pick up later this year, suggesting interest rates will be raised rather than cut when the Bank of Korea next changes its policy.
Although annual inflation in South Korea has remained in the 1-percent range, the nominee added there was no need at present to change the central bank's current target band from 2.5 to 3.5 percent, as it was on par with the central bank's forecasts.
"Changing the target band could lead to trust issues," said Lee. Still consumer inflation in South Korea shows few signs of an imminent pickup, with central bank data released early on Wednesday showing the produce price index falling on an annual basis for a 17th consecutive month.
Local markets were relatively quiet on Wednesday, with the won and stock market nearly flat as of 0330 GMT while June futures on three-year treasury bonds rose 0.04 points to trade at 105.83.
"There doesn't seem to be much Lee can say at this point...I doubt he can affect the market much," said a bond dealer in Seoul, stressing little change in market views for a hike later this year.
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