The Bank of Korea is facing mounting pressure to broaden its mandate for the first time in nearly a decade as global central banks are asked to tackle a wider range of economic issues highlighted by the pandemic.
More than a dozen South Korean lawmakers are pushing for the passage of a bill to add employment stability to the BOK’s mandate, a goal shared by some other central banks including the Federal Reserve and the Reserve Bank of Australia.
The proposal comes as Korea’s job losses pile up this year despite government support. It also reflects a growing public perception that the role of central banks can no longer be narrowly focused on inflation, especially when the need to ensure price growth seems less pressing than other economic problems.
“We are in the midst of a ‘big shift in central banking’, one that is playing itself out not only in Korea but elsewhere, too,” said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc. “In practice, however, this is a tricky undertaking: various mandates can at times stand in conflict to each other.”
BOK Governor Lee Ju-yeol last month said the bank would actively take part in parliamentary discussions on the mandate issue but expressed concern that an added remit could clash with the other goals of price and financial system stability.
There’s also a large body of thought that says central banks can no longer be considered the first solution to all problems in the economy. Fed chief Jerome Powell and European Central Bank head Christine Lagarde are among those who have called for more fiscal support to help economies.
The Fed defines its jobs goal as aiming for the maximum level of employment that can be sustained with stable inflation, while the RBA calls for full employment. A draft bill in Indonesia earlier this year called on the central bank to work more closely with the government to support the economy.
In New Zealand, the government has asked the central bank to go beyond its maximum sustainable employment and inflation mandates and consider housing price stability, too.
What Bloomberg Economics Says
“Given the BOK’s relatively limited policy toolkit, efforts to support employment could clash with its other mandates. Keeping interest rates low for a prolonged period to spur job creation, for example, could also stoke asset price bubbles — running counter to the central bank’s objective of financial stability.”
— Justin Jimenez, economist
The Korean bill doesn’t specify exactly how the jobs mandate should be carried out, suggesting plenty of debate will be required. The push to introduce a financial stability mandate dragged on for years before its approval after the global financial crisis. A jobs mandate has been proposed in the past, too, without gaining traction.
Still, the momentum is larger this time as support for the bill comes from both ruling and opposition lawmakers.
To be sure, the BOK already considers jobs to some degree as it reviews monetary policy. The bank has already done some of the heavy lifting to support the economy through the pandemic including a 75 basis-point rate cut, cheap loans to companies, government bond purchases, and a special program to buy corporate debt.
On top of this, Lee has repeatedly said the bank stands ready to act with unconventional monetary steps if needed.
How the bank would achieve a jobs goal beyond maintaining stimulus for longer is also unclear, as is the yardstick of employment it would use, given the volatility of Korea’s jobless data.
Defying change would come at a cost, though.
At a parliamentary hearing earlier this year, some lawmakers accused BOK officials of being aloof in the midst of a crisis. Yoo Sung-kull, an opposition party lawmaker behind the bill, said the downsizing of the bank should be considered if it sticks only to its existing mandates.
— With assistance by Enda Curran
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