By Yoo Seungki
SEOUL, Oct. 2 (Xinhua) -- Bank of Korea (BOK) got approval in December 2011 to overhaul its monetary policy toward strengthening non-policy rate tools, away from focusing only on adjusting interest rates.
Before the BOK Act revision, the South Korean central bank concentrated on altering policy rate to secure price stability. There were various open market operation (OMO) tools, but they were mainly used to steer the overnight call rate around the altered base rate.
After the BOK Act revision, the central bank was granted the other mandate of ensuring financial stability in addition to the mandate of stabilizing consumer prices. The addition has caused a significant change in the BOK's implementation of monetary policy toward depending more on non-policy rate tools.
Greater dependence on such tools was expected to discourage the BOK from altering its policy rate as usage of other tools would help contribute to achieving its policy goal without a change in its policy rate.
The semi-annual monetary policy report submitted by the BOK on Tuesday to the National Assembly explained how its policy tool usage has changed since late last year, and hinted at how its policy direction would change down the road.
NEITHER DOVISH NOR HAWKISH
BOK Governor Kim Choong-soo was viewed as dovish in early 2012 as the central bank made no change in its policy rate despite mounting inflationary pressures. President Lee Myung-bak said in a New Year address that he will set price stability at the center of state management for 2012, while Finance Minister Bahk Jae-wan placed his top priority at easing inflation.
A couple of months later, Governor Kim started being seen as hawkish as the central bank refrained from cutting its policy rate despite growing concerns over the protracted European debt crisis. The BOK cut borrowing costs by 25 basis points (bps) to 3 percent in July, but expectations for another cut deepened as reflected in the three-year Korea Treasury Bond (KTB) yield that has stayed below the policy rate since early July.
As was the BOK governor either dovish or hawkish, the governor can be seen as neither dovish nor hawkish adversely. The paradoxical phrase can be explained with the BOK's more micro- economic policy tools granted by the BOK Act's revision. In addition, it hinted that the central bank would remain reluctant to alter policy rates.
The South Korean central bank newly established special soft loans worth 1.5 trillion won (1.35 billion U.S. dollars) at the September rate-setting meeting when the bank froze the policy rate at 3 percent. The low rate loan will be extended by the BOK to local banks based on their performance of converting high-rate loans into low-rate ones for self-employed with low credit and low income. In early April, the BOK set up similar soft loans for small- and mid-sized enterprises (SMEs) worth 1 trillion won.
The soft loans can be viewed as a micro-economic tool as the loans set their targets in a more concrete manner, unlike macro- economic policy tools such as policy rate alteration that would have indiscriminate influence on the overall economy. The so- called aggregate credit ceiling loan had existed before the BOK Act's revision, but the revision made the loans more targeting and more detailed.
The BOK invested 135 billion won in late July into stocks of Korea Housing Finance Corp. (KHFC) as part of efforts to help improve the structure of household debts, according to the monetary policy report. The BOK bought the KHFC stocks worth 310 billion won in 2004 when the mortgage-backed securities (MBS) issuer was established.
It indicated that the BOK may not take direct action to solve the household debt problem by altering policy rates. The bank may seek another measure such as purchase of stocks in the KHFC that will allow the MBS issuer to buy more mortgage loans from banks and in turn, enable local lenders to lend more loans to households.
The BOK developed its own systemic risk assessment model late last month for the first time among Asian central banks. The model will gauge quantitative system risks, enabling the BOK to secure numerical data of system risks, according to which the rate- setting decision can be made.
After cutting the policy rate to 3 percent in July, BOK Governor Kim said lower borrowing costs will lessen the debt- servicing burden for households rather than boosting the already- excessive household debts. It hinted that the policy rate can be altered to ensure financial stability.
The numerical data secured through the risk assessment model seemed to encourage the BOK to alter policy rate more frequently at first sight, but the past experience showed that the BOK would refrain more from changing the rate.
During the one-year period before the rate cut in July, the central bank had based its monetary policy decision on three pillars, including domestic economy, local inflation and external economic conditions. Only after all the three conditions were met, the BOK changed the policy rate. The additional pillar, or quantitative data of systemic risk, will lead the BOK to hesitate the policy rate alteration.