New BOK Board Seen Favoring Lower Rates for Growth

  • Central bank watchers say most candidates have dovish stance
  • Four new nominess will vote on interest rates from May 13

A changing of the guard on Bank of Korea’s board will usher in four policy makers with links to the government, increasing speculation that the BOK may cut borrowing costs that are already at a record low.

The nominees announced Monday to replace members vacating their positions on April 20 have all worked directly in government or for state-funded research organizations. The current board’s last rate-decision meeting will be held April 19, with the new members to make their first determination at a gathering on May 13.

“Candidates from the government or state think tanks tend to be more aligned with government policy,” said Park Chong Hoon, head of research for Standard Chartered Bank in Seoul. “We expect additional fiscal stimulus in the second half of the year for growth, which would increase the need for monetary policy coordination.”

Standard Chartered’s view that the key rate -- currently 1.5 percent -- will be cut twice this his year has been bolstered by the announcement of the nominees, Park said.

KDI View

Among the candidates is Cho Dong Chul, chief economist for Korea Development Institute, which has been calling for accommodative monetary policy to boost inflation for several years. KDI has even highlighted concern that South Korea faces deflationary risks.

Another candidate Shin In Seok had also previously worked as an economist for KDI and was a member of the National Economic Advisory Council, which offers advice to the president. Shin is currently head of Korea Capital Market Institute.

Koh Seung Beom joins from the Financial Supervisory Commission -- the government’s financial regulation unit -- and was also recommended by the FSC. Koh had previously worked for the finance ministry. Koh is a “government person” and is likely to have a dovish stance, according to report on Tuesday report by Hana Financial Investment.

Lee Il Houng, recommended by the Bank of Korea, is currently the head of state-funded Korea Institute for International Economic Policy. Lee is seen as the sole new member who might show resistance to further monetary easing, according to reports by Hana Financial and NH Investment & Securities.

Possible Dissenter

Lee was cited by Yonhap News as saying in February 2015 that there is a need to consider whether a rate cut is really necessary when the Federal Reserve is increasing rates.

BOK’s board includes the governor, senior deputy governor, and five other members, each recommended by different organizations, like the finance ministry or chamber of commerce. While board members remain independent, investors speculate that they sometimes reflect the views of the organizations that have recommended them. 

The four nominees must be approved by President Park Geun Hye.

Aggressive policy

Separately, South Korea’s ruling Saenuri party said in its economic policy platform released ahead of next month’s parliamentary election that it will ask the central bank for aggressive policies including more debt purchases.

With developed nations performing quantitative easing after the limits for rate cuts became obvious, the BOK should also consider directly purchasing mortgage-backed securities and bonds sold by Korea Development Bank, according to a statement on the Saenuri party website.

The BOK currently purchases government bonds and some state-guaranteed debt, and issues monetary stabilization bonds as part of its open market operation to control liquidity.

“Saenuri’s plans are part of an election pledge so it’s not easy to judge whether they will be realized soon, but the BOK won’t be able to ignore this as it comes from the ruling party,” economists including Park Sang Hyun at HI Investment & Securities Co. wrote in a report Tuesday. “Still, for a non-key currency country like Korea, quantitative easing could result in side effects like the value of the won plunging and leading to capital outflows.”

The yield on South Korea’s three-year government bonds fell three basis points to 1.46 percent at the 3 p.m. close in Seoul, while the yield for five-year notes declined four basis points to 1.56 percent. The central bank held the key interest rate unchanged at 1.5 percent on March 10. The minutes of the meeting are released later this afternoon.