[Editorial] Gov`t Role in Monetary Policy Committee

After Vice Strategy and Finance Minister Huh Kyung-wook attended the monthly meeting of the Bank of Korea’s Monetary Policy Committee yesterday, the government is under criticism for attempting to influence the central bank’s monetary policy. Article 91 of the Bank of Korea Act, which took effect in April 1998, however, allows vice finance ministers and the vice chairman of the Financial Services Commission to join a committee meeting though they have no voting rights. Therefore, Huh’s attendance itself should be no cause for criticism.

The Strategy and Finance Ministry naturally has interest in the committee’s decisions on interest rates since the decisions reflect the central bank’s intent to curb inflation but also affect the whole economy. All the more so since the market considers a rise in the benchmark interest rate an indication of the implementation of an exit strategy. In such a situation, the ministry should announce its opinions officially or in official settings. Presenting its stance on interest rates from time to time at the end of news briefings can be seen as ignoring the committee. The bigger problem is the absence of former finance vice ministers at the rate-setting meeting. Of 142 such meetings, only four had such people attend. The Financial Services Commission should also take part in committee meetings instead of raising different opinions outside of them.

If seven committee members feel pressured because of the attendance of government officials and their opinions, this means the committee is a weak institution. For its part, the committee should fulfill its duty as stipulated in Article 93 of the Bank of Korea Act, by actively presenting its opinions to the government when important financial and monetary policies are devised.

The ministry and the central bank have long been at odds with each other. Last year, they clashed over a revision to the act to give the bank the right to investigate financial institutions a limited basis. The Financial Supervisory Service has also weighed in on the dispute. At the beginning of the global financial crisis in 2008, the ministry and the bank locked horns over injecting liquidity into the market. The institutions should act to stabilize the financial market but instead have occasionally served as a source of instability. On the surface, they dispute the direction of financial policy but in many cases, they seek to expand their influence by clashing and compete to appoint people to key posts at financial institutions.

In the wake of the global financial crisis, countries are reviewing the functions of their central banks. Korea should also streamline its financial supervision system to one that allows the government to formulate swift and accurate policy responses in a broad sense. In this sense, close policy coordination between the government and the central bank is a must. Hopefully, the attendance of the vice finance minister at the monetary committee’s monthly meetings will lay the groundwork for creating desirable practices.