South Korea central bank to expand forward guidance on policy rate path

The Bank of Korea (BOK) plans to expand its forward guidance scheme by offering a dot plot of the likely path of future interest rates to better communicate monetary policy to market participants, governor Rhee Chang-yong said on Thursday (Sep 18).

Such a scheme would expand on the current one, in which Rhee verbally reveals the six board members’ conditional views over a three-month horizon at a news conference following each policy rate review.

“The Bank of Korea is conducting forward guidance pilot tests,” Rhee said in a speech prepared for this year’s Camdessus Central Banking Lecture at the International Monetary Fund.

“Six Monetary Policy Board members, excluding myself, then indicate their views on the rate path for the next year using dots,” Rhee said, adding that the graphical paths were currently for internal use only.

Once adopted, the move would be a major change in how the bank produces and communicates policy, as part of a wider push to improve transparency and boost public understanding of its actions.

On Thursday, the bank explained that the internal pilot system also allows the six board members to plot two to three dots per horizon to indicate probabilistic rate views.

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Rhee expects to develop this initiative further to make it “an effective channel for monetary policy communication”, he said.

At its Aug 28 meeting, the BOK voted 6-1 to keep unchanged its benchmark interest rate at 2.5 per cent, in line with expectations. REUTERS