Most Commissioners of the Bank of Korea's monetary policy committee said on the 26th that the base rate will likely remain at the current annual 2.5% level through August. Bank of Korea (BOK) publicly released this rate outlook for the first time using a "dot plot." The seven Commissioners each placed three dots to show their rate outlook six months ahead. Of the 21 dots, 16 landed at 2.5%.

The dot plot was first introduced in the United States in 2012. It was adopted so the public could anticipate the future path of interest rates and make decisions on consumption and investment.

A dot plot shows the seven Monetary Policy Board members' projections for the base rate. /Courtesy of Bank of Korea

◇ Bank of Korea (BOK) releases, for the first time, a chart of Commissioners' interest rate outlook six months ahead

There are four remaining policy board meetings to decide the direction of currency policy through August: in April, May, July and August. Given that the base rate is typically adjusted in 0.25 percentage point (p) increments, the plausible rate range is 1.5% to 3.5%, either 1 percentage point lower or higher than now.

According to the six-month-ahead interest rate dot plot that Bank of Korea (BOK) released for the first time that day, 16 of the 21 dots are placed at 2.5%. Most Commissioners judge there is a high possibility that the current rate level will be maintained six months from now. Four dots are at 2.25%, indicating some Commissioners see a possibility of one cut. One dot is at 2.75%, suggesting a possibility of a hike.

◇ Dot plot adopted by the United States in 2012 to improve interest rate predictability

The U.S. Federal Reserve first adopted the dot plot in 2012. After the 2008 financial crisis, the Fed lowered the federal funds rate to effectively zero (0) and conducted quantitative easing. As the Fed lowered rates to a record low, investors began paying attention to "when the Fed will raise rates." The Fed began publishing the dot plot to increase investors' ability to predict the direction of rates.

Unlike Korea, the United States decides a "range," not a specific level, for rates. The current U.S. policy rate is 3.5% to 3.75% annually. Also, 19 members participate in the Fed's rate decision, and each places only one dot. Bank of Korea (BOK) judged that, with only seven Commissioners, having each place just one dot would not provide the public with sufficient information. Therefore, each was instructed to place three dots. They were asked to project the rate level under three scenarios: if BOK's current economic outlook materializes in six months, if the economy turns out worse than the outlook, or if it turns out better.

The dot plot released by the U.S. Federal Reserve in December last year shows 19 dots representing the interest rate projections submitted by Federal Open Market Committee members. /Courtesy of Federal Reserve

◇ Bank of Korea (BOK) adopts dot plot to enhance transparency in rate decisions

Experts said Bank of Korea (BOK)'s dot plot will help read the future policy path. Park Sang-hyun, a researcher at iM Securities, said, "Personally, I do not think the usefulness of the current forward guidance is great," adding, "A six-month outlook is positive in that it allows us to read the economic or inflation trends that Commissioners have in mind and, to some extent, interpret the direction of rate policy accordingly."

Rhee Chang-yong, Governor of the Bank of Korea, speaks at a press briefing on the interest rate decision by the Bank of Korea's monetary policy committee at the Bank of Korea in Jung District, Seoul, on the 15th of last month. /Courtesy of News1

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