VIEW: J.P.Morgan On Rhee Changyong’s Nomination To Be The Next BoK Governor

In the wake of Rhee Changyong’s nomination to become the Bank of Korea’s next Governor, J.P.Morgan note that “considering that the appointment process takes 2-3 weeks for cabinet meeting and the National Assembly’s hearing session, there will be at least a few days’ gap between Governor Lee’s retirement on March 31 and Governor Rhee’s inauguration. As a result, the new Governor’s official term is likely to start after pre-MPC preparation work in early April (discussion with the staff on updating macroeconomic outlook), and uncertainty lingers whether the new Governor will chair the April meeting depending on the timing of the National Assembly’s hearing session. That said, the announcement of the new Governor averted the risk of extended delay amid a political standoff, and the gap between the two Governors’ terms was minimised, given the special occasion this time with overlapping transition periods in the terms of both, the Korean President and the BoK Governor.”

• “In terms of Rhee’s monetary policy stance preference, the recent comments by the appointee in media interviews have been cautiously mixed but modestly hawkish, in our view, including ,“need to deliberately fine-tune macroeconomic policies for soft landing of financial markets by monitoring growth trend”; “above-target inflation amid incomplete recovery”; and “need to adjust household leverage through policy rate hike”. These comments are likely consistent with the existing communication by the MPC in the current macroeconomic context. Thus we expect the MPC’s current policy guidance of gradual policy rate normalisation to be maintained in the near term, given the upside risk to inflation and the BoK’s outlook on gradual growth recovery (yet with a newly rising downside risk from geopolitical noise). In all, we continue to expect a follow-up 25bp hike in Q2 (baseline case for April is a close call, the probability of a delay to May is rising).
• “Also, the appointee Rhee has highlighted long-term challenges to the Korean economy from population aging, secular downward trend in potential growth, and decreasing fiscal policy space due to the growing demand on fiscal expenditure for the elderly. In principle, such long-term headwinds on potential growth should primarily be a focus of structural reforms, instead of being monetary policy’s main consideration. That said, projecting post-COVID/geopolitical noise growth and inflation environment in the long-term, the BoK’s monetary policy is expected to nimbly react to the growth and inflation outlook on both sides of cycles (hike or cut), to stably anchor inflation expectations under the low-potential-growth environment.”