South Korea's central bank chief nominee sees "communication problem" in hike

Lee Ju-yeol, the nominee to be the next chief of South Korea's central bank said on March 19, 2014, there was a communication problem when the Bank of Korea unexpectedly cut interest rates in May last year. -- FILE PHOTO: REUTERS 
Lee Ju-yeol, the nominee to be the next chief of South Korea's central bank said on March 19, 2014, there was a communication problem when the Bank of Korea unexpectedly cut interest rates in May last year. -- FILE PHOTO: REUTERS 

SEOUL (REUTERS) - The man nominated to be South Korea's next central bank chief emphasised on Wednesday the need to improve communication with financial markets, effectively accepting broad criticism of the bank's credibility.

Nominee Lee Ju-yeol, who had worked at the Bank of Korea for 35 years, made the admission before a parliamentary confirmation hearing.

"I think there was a communication problem," said Lee, commenting on a surprise decision last May to cut interest rates.

Outgoing Governor Kim Choong-soo, who was a close aide of former President Lee Myung-bak and had no previous work experience at the central bank, has been criticised for giving in too easily to pressure from the government.

Kim raised the policy interest rate by 125 basis points between July 2010 and June 2011, while cutting it by 75 basis points between July 2012 and May 2013.

He was criticised for being too slow when raising it and too slow when cutting it.

Little is known of his voting record at the Bank of Korea, but Lee is widely perceived to be more assertive in upholding the orthodox central bank policy stance of focusing on curbing inflation.

A Reuters poll conducted ahead of the March 13 policy meeting showed analysts have priced in a slightly higher chance of an interest rate increase during this year since Lee's nomination, which was announced on March 3.

A recent legal change means that a nominee central bank chief nominees will have to testify at a confirmation hearing.

Although the parliament has no right to block Lee's appointment, the hearing could still sway public opinion.

South Korea's economy, the fourth-largest in Asia, has been on a solid recovery track and inflation is expected to pick up later this year, suggesting interest rates will be raised rather than cut when the Bank of Korea next changes its policy.

Young Sun Kwon, economist at Nomura in Hong Kong who worked at the Bank of Korea for several years together with Lee, said chances of the Bank of Korea cutting interest rates again were extremely slim.

"We believe that only a synchronised global downturn (due to a prolonged and massive market sell-off in association with collapsed sentiment and a credit crunch) can trigger a rate cut in Korea," said Kwon in a research note this week.

Still consumer inflation in South Korea shows few signs of an imminent pickup, with central bank data released early on Wednesday showing the produce price index falling on an annual basis for a 17th consecutive month.

Lee is expected to chair his first monthly policy meeting on April 10, with a follow-up news conference that day potentially providing more clues to his policy stance.

Lee has a master's degree in economics from Pennsylvania State University.