Policymakers` Comments Send Shockwaves through Financial Market

“The most urgent thing is to stabilize inflation.” (President Lee Myung-bak)

“The media portrayed the president as saying that ‘Inflation stabilization should be placed before growth,’ but this is not true.” (Strategy and Finance Minister Kang Man-soo)

“Recently, the won-dollar exchange rate rose to 1,030 won which I believe was testing its ceiling.” (Bank of Korea Governor Lee Seong-tae)

The financial market has been jolted whenever high-ranking officials in the economic and financial policy community have made “abrupt comments” on growth, inflation, exchange rate, and interest rate that have been inconsistent with one another. Although they think their arguments are clear and logical, their incoherent messages without fine-tuning significantly harm and damage the financial market.

Since assuming his post in Feb 29, Finance Minister Kang Man-soo, with his strong belief in government control of exchange rates and priority in economic growth, delivered a clear message that lived up to his reputation in both direct and indirect ways. To sum up, he said that the government should take measures to raise the won-dollar rate as well as reduce interest rates to maintain growth and current account rates. His remarks had an immediate impact on the financial market, resulting in skyrocketing exchange rate and a fall in market rate.

This lead to criticism against the argument of bringing down inflation over economic growth, which President Lee Myung-bak made reference to in an attempt to try and put an end to the controversy. He said, “The most urgent thing the administration should deal with is to stabilize inflation.”

Against this backdrop, Minister Kang maintained that the president’s remarks were misunderstood. Kang explained, “Media report of Lee’s message focusing on inflation over growth sent the completely wrong message to the exchange market.”

Kang added, “The financial situation we face today is similar to that of a decade ago when the nation was hit by a financial crisis with worsening currency account balance and strong won.” He emphasized the need to cut interest rates and raise exchange rates.

Vice Minister of Finance Choi Jung-kyeong also added fuel to the fire by saying, “The gap in interest rates between Korea and the U.S. widened to 2.75 percent. This could cause uncertainty in the financial market as dramatic differences in the interest rates at home and abroad make foreign investors flee from the domestic market.”

There are various interpretations over his remark. Some say Minister Kang overturned what the president said. Others say that the country lacks leadership on economic policy issues.

With regard to Kang’s remarks on Wednesday, the market seemed to understand as he defied the president. A closer look, however, into these remarks reveals that the minister’s statement was in line with Cheong Wa Dae.

A high-ranking official with the Finance Ministry commented, “If you look at the president’s transcripts, you will see the president clearly stating that, ‘stabilizing inflation is the most urgent economic policy we need at the moment, but that the promise of a 7 percent growth rate should be sustained.’” He added, “This is why the minister intervened to correct media reports since the market misunderstood them as if pursuing growth was no longer an economic priority.”

In order words, Minister Kang’s remark is nothing short of an emphasis of the president’s commitment to an economic revival. An official in the presidential office said, “Senior Presidential Secretary for Social Affairs Kwak Seung-jun and Senior Presidential Secretary for Economic Affairs Kim Choong-soo have made frequent contacts as they have two to three rounds of phone conversations a day. Given this situation, it is absurd to believe they didn’t fine-tune when the minister offered an explanation about the president’s message.”

Presidential spokesperson Lee Dong-kwan commented, “The president’s remarks were reported as if he said the government’s policy focuses on inflation, instead of growth. This is different from what he intended to say.”

The response from the Bank of Korea has drawn our keen interest.

Bank of Korea Governor Lee’s remarks run counter as he said, “Our biggest priority is to stabilize prices. The won-dollar rate reached an all time high to 1,030 won, which I believe put to the test its highest point.”

“A decrease in the interest rate encourages overall demand, translating into an increase in imports and current account deficit,” said the governor of the central bank. He argues that a rise in the interest rate is necessary to improve the current account balance. He submitted empirical data indicating that a quarter point increase in the interest rate would result in an annual improvement of 370 million dollars based on current account over three years.

Regarding the exchange rate, Governor Lee said, "The central bank believes that exchange rate policy is the original right of the government. But our bank laws suggest that the bank should play a role in the policy as a negotiator with the government. Stabilizing the won-dollar rate is required to bring down inflation."

Minister Kang’s remarks Tuesday sent the won-dollar rate up 10.50 won from the day before, closing at 986.80 won. On Monday, Governor Lee’s statement caused the rate to nosedive by 20.9 won. Mixed remarks from economic policy authorities have made the financial market volatile.

The same goes with interest rates. The president’s statement over the weekend prompted interest rates of 3-year treasury bonds to jump 0.11 percent on Monday as people’s anticipations for interest rate cut diminished.

A source at a commercial bank was critical, saying, “The barrage of irresponsible remarks from government authorities have led to more volatility, not stability in the market.”