Tuesday, April 3, 2012

The Bank of Korea's credibility dilemma

(Reuters) - Unlike most central banks, the Bank of Korea has the pursuit of "harmony" written into its statutes.

But when it comes to harmonizing with the government, South Korea's central bank may have gone too far, undermining its credibility as an effective counterweight in managing Asia's fourth-biggest economy, interviews with current and former Korean policymakers say.

Indeed, those sympathies may draw even closer to those of the government. Almost the entire slate of the central bank's seven-person monetary policy committee is due to be replaced this month, including two who are known for their inflation-fighting bias.

The country's president, Lee Myung-bak, will select the replacements.

Central bank independence is prized as a check and balance to governments and presidents who naturally favor economic growth, especially when elections are coming up, as they are in South Korea.

"The Bank of Korea has much to do to regain its credentials as an independent policymaking organization," said one of the central bank's current board members, who declined to be identified because of the sensitivity of the issue. Read More