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(News Focus) BOK head seen as putting growth before stability
By Lee Youkyung
SEOUL, March 12 (Yonhap) -- Bank of Korea (BOK) Gov. Kim Choong-soo is increasingly losing market trust as the top inflation fighter in Asia's fourth-largest economy as his recent remarks seem to be paying more attention to economic growth than anti-inflation efforts, analysts said Monday.

   The BOK's latest rate freeze is widely seen as another testament to the central bank's emphasis on boosting the economy in the face of growing uncertainty, which experts say may compromise its long-held image as the last bastion of price stability.

   Despite persistent worries over inflation, the central bank left the key interest rate unchanged for the ninth month at 3.25 percent last week, failing to wield its primary policy tool for another month due to the economy's uncertain growth prospects.

   "Previously, the BOK's role was to prioritize price stability in the mid-term horizon. Now it is also mindful of economic growth as well as global financial stability," said Hanyang Securities analyst Jeon So-young, who forecast a rate cut later this year.

   "When the BOK's role in curbing supply-side inflation is limited, the BOK may have to put its focus on growth."
Even though Jeon represents a minority voice, the central bank's focus on economic growth may not be a surprise, given that Kim was a former economic advisor to President Lee Myung-bak, a proponent of growth-oriented economic policies.

   The BOK chief's closing remarks after the March rate-setting meeting revealed why he believes South Korea's economic growth is important for global economic growth. They also implied that he may steer the central bank to become a conduit for economic expansion.
"Without the global economic growth we cannot overcome the challenges that we are facing. My personal thought is that the role played by emerging Asian countries should be very big," Kim told reporters.

   "Because the global economy is very important for an open economy like South Korea, we should no longer think about just getting benefits from the global economy (as an exporter) without making any contributions to it. In that sense, the central bank will try to play such a role," he said.

   Some analysts, including Yoon Yeo-sam of Daewoo Securities, interpret the final remarks as undermining the likelihood of a rate hike in the coming months. This is due to how conscious Kim is about growth in Asian countries, including Korea, in driving global economic output, which he believes further boosts the domestic economy.
On the inflation front, as the BOK was forced to postpone its policy change by another month, its decision-making monetary policy committee likely had no choice but to rely on rhetoric to convince the market that it is not sitting with its hands tied behind its back.

   But the careful confidence from the BOK policy committee that the central bank can contain inflation within its target range without moving its key policy tool could be misguided, as its efforts to curb high inflation expectations from consumers without a policy change has thus far proved futile, market watchers said.
The BOK's latest poll showed that the median inflation rate forecast for the coming 12 months stands at 4 percent, the ceiling of the central bank's inflation target band of 2 to 4 percent.

   Apparently aware of stubbornly high inflation rate expectations from the public, the committee's March statement raised its rhetoric from the previous month, saying it will be "endeavoring to lower inflation expectations."

   But the market was more focused on the following remarks from the BOK chief that the annual inflation rate will stay within the central bank's target band of 2 to 4 percent if oil prices stay at the current level.

   The chief's remarks dissipated worries that the current oil prices at around US$120 per barrel for Dubai crude may send inflation soaring above the target, weakening the view the committee's stance on price is hawkish.

   Kim also added that conditions for resuming monetary tightening are not ripe because the recovery in the real economy around the world has not kicked off.

   The comments sent a signal to the market that a further rate hike is unlikely until the global economic uncertainties clear out and the BOK will be watching the global economic situations more closely while trying to lower inflation expectations by means other than a rate hike.

   Analysts said Kim may have been shooting himself in the foot. Contradicting the committee's pledge to endeavor to tame inflation expectations, Kim sent a signal that a monetary tightening is far off, which did little to quell inflation worries in the market.

   "The BOK shares the blame for driving up inflation expectations. It is the BOK's leadership problem in particular," said Ha Joon-kyung, a professor of economics at Hanyang University.

   "Inflation expectations become lower when the BOK firmly maintains its independence and shows its willingness to keep prices stable, rather than passively pursuing government policies."

   The BOK head also played down the likelihood of mounting household debts triggering another financial crisis in the country and said a rate hike is uncalled for to lower private debts.

   The remarks are another indication that the BOK is incapable of actively pursuing its monetary policy out of a fear of hurting the stability of the real economy, another market watcher said.