Will BOK expand forward guidance?
The case for the Bank of Korea implementing expanded forward guidance is strengthening, propelled by the growing need to forestall the prolonged economic slowdown, a byproduct of sustained elevated interest rates. More specific forecasts from the central bank’s rate-setting monetary board members can help limit market uncertainties.
Forward guidance refers to a central bank’s communication on the current state of the economy and the likely future course of monetary policy. Central bank governors provide it during press conferences by answering questions from the media.
The U.S. Federal Reserve has a visualized version, as encapsulated by the so-called dot plot, data consisting of dots on a graph. Hints about the timing and scope of rate cuts can be inferred from the quarterly data of Fed officials’ economic and interest rate forecasts.
The BOK does not provide any similar visualized reference. However, Governor Rhee Chang-yong was first to make a summary of monetary policy board members’ assessment and forecast of the key rate trajectory on a three-month horizon during a media briefing in November 2022.
The widely dubbed “conditional forward guidance” was a major shift from the long-held previous BOK norm defined by limited access, with monetary policy board meeting minutes being the only clue for market participants.
Some say the expansion of forward guidance can backfire, as illustrated by the Fed and the European Central Bank delivering large rate cuts despite previous dovish comments made in public fora.
Whether and by how much the current directive would expand will be determined in part by the evaluation of Rhee’s dot plot in a BOK-commissioned report scheduled for publication before the year’s end.
Hyundai Research Institute senior researcher Ju Won said in a report that the central bank should adopt a more aggressive form of forward guidance.
“Sustained elevated high interest rates continue to deter the recovery of local demand,” he said. “The central bank should fortify forward guidance to ease market uncertainty.”
Economic participants have been and will continue to be unable to engage in economic activities, he added, strained largely due to market volatility brought on by monetary policy uncertainties, compounded further by surging interest rates in the years since the pandemic. The conditions can and should be, in his view, mitigated by central banks’ clear verbal assurances.
“The BOK can consider non-traditional guidance, including active engagement of monetary board members in a public forum, as seen in the United States,” he said.
“Not only the Fed chair but also the members of the Federal Open Market Committee do not shy away from making assessments of the economic conditions and key datasets.”
Rhee maintains that conditional forward guidance is effective, provided that the central bank makes a clear outline of the course of economic condition developments.
“The economic conditions and outlook could change after the BOK assessment for a designated period is concluded, exacerbating market volatility,” Rhee said in a speech at an academic conference on economics in February.
“That said, the central bank can ensure that the market participants understand that monetary policies can be revised upon changes in evolving market conditions and the arrival of new datasets. Others view that the market can preemptively price in certain impending and foreseeable risks.”
Expanded forward guidance is recommended since the current information available for monetary policy forecasts is too limited, according to Park Chong-hoon, head of the Korea research team at Standard Chartered Korea.