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Central bank

BOK urged to expand price stability mandate to employment

Nov 11, 2020 (Gmt+09:00)

Lawmakers from both ruling and opposition parties in South Korea have joined forces to propose employment stability be added to the Bank of Korea’s new monetary policy objectives, alongside price stability, in an aim to expand the BOK's role to crisis fighter.

The move comes as South Korea’s jobless rate climbed to a 20-year high of 3.7% in October, hit hard by the pandemic fallout, according to Statistics Korea on Nov. 11. That compares to September's jobless rate of 3.6%.

Ryu Sung-kull of the main opposition People Power Party has put forward a proposal to amend Article 1 of the Bank of Korea Act, the lawmaker said on Nov. 10. The ruling Democratic Party’s finance committee head participated as a co-proposer of the motion after other ruling party members proposed similar bills.

“Ruling and opposition members shared the view that the Bank of Korea’s role needs to be redefined,” Ryu told The Korea Economic Daily.

The first clause of the Bank of Korea Act’s Article 1 stipulates that the central bank pursues price stability through the formulation and implementation of an efficient monetary policy, and the Bank of Korea makes price stability the most important objective of its monetary policy.

The proposed amendment inserts “employment stability” between the phrases of “price stability” and “through the formulation” in the first clause of Article 1. For its monetary policy board, a new clause would be added for its seven members to discuss financial support measures for employment stability.

That would enable the Bank of Korea to carry out both quantitative easing and nontraditional monetary policies such as price-level targeting, according to the lawmakers.

Their move to revise the Bank of Korea Act reflects the dual mandate given to central banks in major economies such as the US, UK and Australia as they are required to pursue both goals of maximum employment and stable prices through monetary policy.  

If the bill is passed, it will be the first amendment to the Act in a decade, when it specified “financial stability” as the central bank’s founding purpose.

In June, Bank of Korea Governor Lee Ju-yeol said the fundamental function of a central bank has been brought into question in the wake of the coronavirus outbreak, in a speech to commemorate its 70th anniversary.

Bank of Korea Governor Lee Ju-yeol during a parliament audit in October.
Bank of Korea Governor Lee Ju-yeol during a parliament audit in October.
Given the rising calls for the central bank to work as a crisis fighter, the governor said that he would seriously consider the extent of the central bank’s role, in a Q&A session during a parliamentary regular audit last month.

But an ex-BOK senior official is skeptical of the effectiveness of the proposed amendment to the Act.

“Given the limited policy tools that the Bank of Korea can exercise to support the job market, its monetary policy measures under a revised law will not be effective,” said Korea Institute of Finance’s analyst Jang Min, a former Bank of Korea senior research official.

“Its policy tools for monetary easing and bank supervision need to be supplemented, as well.”

By Dong-wook Jwa and Ik-hwan Kim

Yeonhee Kim edited this article.
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