The Bank of Korea is reviewing a plan to expand forward guidance (collecting and disclosing interest rate outlooks from Monetary Policy Board members). The current approach indicates the policy rate direction three months ahead, but a shift to a dot plot that directly presents the interest rate level within the next year is under discussion.
Kim Byung-guk, Head of Team of the Bank of Korea's Monetary Policy Department, stated accordingly at the seminar "Tasks of the Bank of Korea's monetary policy: Communication and policy tools" held at the Bank of Korea headquarters in Jung-gu, Seoul, on the 15th.
Since Oct. 2022, the Bank of Korea has aggregated conditional policy rate outlooks by Monetary Policy Board members for the next three months. Of the six board members, it compiles how many see a hold, cut, or hike within three months. The governor discloses the results directly at the press briefing held right after the the Bank of Korea's monetary policy committee meeting on the monetary policy stance.
However, this approach is considered relatively cautious compared with major countries such as the United States. The United States publicly releases a dot plot that directly aggregates not the policy direction but the policy rate level from the 19 Federal Open Market Committee (FOMC) members. Unlike the Bank of Korea (BOK), which presents only the outlook three months ahead, the United States presents four horizons: this year, next year, the year after next, and in the long run.
As a result, the Bank of Korea (BOK)'s forward guidance is useful for short-term rate forecasts but has been criticized for falling short in presenting medium- to long-term policy direction. There has also been criticism that, because it presents only the likelihood of a change rather than the level, it is hard to gauge concrete factors such as the number of rate cuts ahead.
Accordingly, since July last year, the Bank of Korea has been running a mock test of a dot plot method that presents two to three rate projections per Monetary Policy Board member within a one-year horizon. During the test, it plans to discuss specific operational plans, including the forecast horizon and presentation method, through communication with economic agents.
Kim said, "Expanding the forecast horizon and adopting a dot plot could improve the predictability of monetary policy by presenting medium- to long-term interest rate forecasts." However, Kim added, "Depending on how it is presented, we can convey both upside and downside risks to the rate outlook, but we should be mindful of issues such as the expansion of the dot plot distribution and the potential gap with actual rate decisions."