[Jo Chang-won Column] The Difficulty of BOK Independence as Challenging as Constitutional Amendment

When the administration changes, the debate over the status of the central bank becomes a regular topic. As expected, Lee Chang-yong, Governor of the Bank of Korea, has publicized the issue of supervisory authority. He argued that the BOK should have supervisory authority over financial institutions to ensure both price stability and financial stability. The National Planning Committee, which is organizing a government reorganization after the Lee Jae-myung administration took office, has strongly appealed for the BOK's supervisory authority.

Strictly speaking, the debate over the status of the BOK is largely divided into two branches: independence and securing supervisory authority. Independence is the authority to decide monetary policy without being swayed by political pressure. Supervisory authority is the power to use micro-supervisory authority over financial institutions and macro-policy tools for financial stability. The current debate is focused on the BOK's supervisory authority.

Strengthening the independence and supervisory authority of the central bank may seem like separate issues, but they are inseparable like two sides of the same coin. Therefore, discussing only the strengthening of supervisory authority without independence lacks persuasiveness. To secure both independence and supervisory authority, a decision-making protocol must be established to determine priorities when price stability and financial stability conflict. Issues of overlap and conflict between supervisory agencies must be resolved with the yardstick of political judgment and policy efficiency.

Of course, the BOK's claim for supervisory authority is very reasonable. Economic policy is increasingly marked by complex factors and uncertainty. If the BOK, for which financial stability is a major task, strengthens its information acquisition and supervision of financial institutions, it can also respond preemptively. The fact that central banks in advanced financial countries like the United States, European Union (EU), and the United Kingdom have stronger supervisory authority also supports Governor Lee's argument.

Nevertheless, to become a well-functioning BOK, independence must take precedence over supervisory authority, as confirmed by several incidents. Recently, U.S. President Donald Trump has been making headlines for publicly pressuring Jerome Powell, Chairman of the Federal Reserve (Fed), calling him a "fool." President Trump is ordering a sharp cut in the benchmark interest rate, but Chairman Powell's insistence on caution seems frustrating and infuriating.

Even conceding a hundred times, there are points where the Trump administration's feelings are understandable. The Trump administration is determined to seize global economic leadership by mobilizing all policy tools, including global tariff negotiations and the depreciation of the dollar, the key currency. In this process, a cut in the Fed's benchmark interest rate is essential as part of the policy mix. Chairman Powell, who failed to grasp this big picture, might appear foolish. On the other hand, the central bank head's sense of mission is vital. If inflation and financial instability erupt, the central bank's raison d'être is shaken.

What we should note is that even the U.S. Fed, with its strong independence and supervisory authority, is vulnerable to pressure from the administration. Media plays suggesting an early replacement of the Fed chairman, whose term ends next May, also bring to mind the issue of central bank independence. Of course, the central government can also craft economic policy with a big picture. However, if the economic crisis caused by the administration's policy missteps or incompetence is blamed on the central bank's interest rate missteps, it is a grossly misplaced responsibility.

The controversy over the BOK's independence cannot be compared to that of the United States. Let's turn back the clock to the second half of last year. At that time, the government and the ruling party repeatedly pressured the BOK to lower the benchmark interest rate. Nevertheless, Governor Lee Chang-yong's refusal to accept this is the basis of the interest rate misstep theory, which claims that the economy has become more difficult. Governor Lee suggested waiting a year to see the results of the interest rate decision. Whether the interest rate misstep theory is correct or an excessive stigma remains to be seen.

Ultimately, the top priority in enhancing the BOK's status is independence. The nature of politics is to seek re-election. The reality of politics is the temptation to intervene in monetary policy to boost approval ratings. Securing the BOK's independence is as challenging as amending the constitution to change the national governance structure. Securing the BOK's supervisory authority must also maintain the perspective of independence. Granting supervisory authority without independence is prone to misuse and abuse. Efforts to consistently prove that the BOK has sufficient expertise to supervise financial institutions must also be made.


jjack3@fnnews.com