Are central bank and government in war of nerves?

Bank of Korea Governor Kim Choong-soo, who is under pressure from the government to lower the benchmark interest rate, did not attend a meeting on economic and financial strategy held at the presidential office Friday. There were mixed views about his no-show; some interpret it as "an attempt to avoid unnecessary suspicion ahead of making a decision on key interest rates," while others view it as "an expression of his displeasure over attempts to encroach on the central bank’s turf."

Meeting attendees included Deputy Prime Minister and Finance Minister Hyun Oh-seok, Senior Presidential Secretary for Economic Affairs Cho Won-dong, Financial Services Commission Chairman Shin Je-yoon and Financial Supervisory Service Governor Choi Soo-hyun. The bank governor stayed at the central bank. When reporters asked if he attended the meeting after it was over, Kim simply answered, “At an important time, the head of the central bank should stay at the bank.”

As the governor was initially expected to attend the meeting, experts have predicted that the chances are high that the interest rate will be lowered since the governor will exchange views with the government. Breaking market expectations back in July 2012, the Bank of Korea lowered the benchmark rate by a quarter point from 3.25 percent to 3.0 percent at its Monetary Policy Committee, which was held two days after the governor attended a similar meeting.

After his no-show at the meeting was confirmed Friday, the financial services sector was busy trying to figure out what it meant.

“If the Bank of Korea lowers the interest rate after the governor attended the meeting, it could be seen that the rate cut has been mediated between the bank and the government,” said an official at a private economic research institute. “Therefore, Kim probably did not attend intentionally so as to lower the interest rate in accordance with the government’s policy.” A source in the banking industry said, however, "The governor seems to express his displeasure toward the government, which pressured the bank to lower the rate."

Since the government and the presidential office are seeking to adopt a supplementary budget to revive the economy, the central bank’s rate cut is viewed as a must to maximize the impact of the supplementary budget.

buddy@donga.com