Introduction to Monetary Policy
The Bank of Korea (BOK) has announced plans to expand its forward guidance scheme. This move aims to better communicate monetary policy to market participants. Governor Rhee Chang-yong revealed that the bank plans to offer a dot plot of the likely path of future interest rates.
Current Forward Guidance Scheme
Currently, the BOK’s forward guidance scheme involves the governor verbally revealing the six board members’ conditional views over a three-month horizon at a news conference following each policy rate review. This scheme is set to be expanded to include a graphical representation of the likely path of future interest rates.
Expansion of Forward Guidance Scheme
The expanded scheme would involve the six Monetary Policy Board members, excluding the governor, indicating their views on the rate path for the next year using dots. The graphical paths are currently for internal use only. Once adopted, the move would be a major change in how the bank produces and communicates policy.
Improving Transparency and Public Understanding
The expansion of the forward guidance scheme is part of a wider push to improve transparency and boost public understanding of the bank’s actions. The internal pilot system allows the six board members to plot two to three dots per horizon to indicate probabilistic rate views. This move is expected to develop into an effective channel for monetary policy communication.
Recent Monetary Policy Decisions
At its August 28 meeting, the BOK voted 6-1 to keep unchanged its benchmark interest rate at 2.5 percent, in line with expectations. The bank’s decision to expand its forward guidance scheme is seen as a positive step towards improving communication with market participants.
Conclusion
The Bank of Korea’s decision to expand its forward guidance scheme is a significant move towards improving transparency and communication with market participants. The use of a dot plot to represent the likely path of future interest rates is expected to provide a clearer understanding of the bank’s monetary policy decisions. As the bank continues to develop this initiative, it is likely to become an effective channel for monetary policy communication, ultimately benefiting the economy and market participants.
