Bank of Korea's Lee Gets New Term in Year of Rising Challenges

(Bloomberg) -- Lee Ju-yeol will remain at the helm of the Bank of Korea for another term, navigating competing concerns about domestic growth and soaring household debt, as well as looming interest rate hikes from the Federal Reserve.

Lee joins Haruhiko Kuroda in neighboring Japan in providing continuity in a year of leadership changes at other central banks, including the Fed and Taiwan’s central bank. The governor of the People’s Bank of China, Zhou Xiaochuan, is also expected to step down.

President Moon Jae-in reappointed Lee, whose term was due to end on March 31, on Friday, making him the first governor to serve a second term since the 1970s.

Lee, 65, will be tasked with reining in soaring household debt without derailing the economic recovery and keeping an eye on capital flows as the Fed guides rates higher. A possible trade war and a flare-up of tensions over North Korea’s nuclear program are also risks.

Lee’s reappointment will cause some analysts to reconsider the prospects of a rate hike at the BOK’s next rate-setting meeting in April. "While I still stick with a July rate hike forecast, there will be rising expectations for a policy change in May or even April, especially if it becomes clearer that the Fed may hike four times this year," said Kim Sang-hoon, a fixed-income analyst for KB Securities Co.

During his first term, Lee lowered the benchmark rate five times to a record-low 1.25 percent, and then raised it to 1.5 percent in November. He has signaled that any further rate hikes will be gradual, given subdued inflationary pressures.

A record level of household debt and the Fed’s rate-hike path could create pressure for a rate increase. Lee has repeatedly said the BOK doesn’t necessarily have to follow the Fed higher, and that large capital outflows aren’t expected even if Korea’s benchmark rate falls below that of the U.S. He has cited the country’s significant foreign-exchange reserves and current-account surplus as buffers against any market volatility.

Governor Lee’s reappointment was unexpected. Because he was appointed by former President Park Geun-hye, some central bank observers had speculated that Moon would appoint someone new to make his own mark on monetary policy. 

Yet choosing Lee helps Moon avoid any backlash from the opposition party or the public. In the wake of political and corporate scandals that toppled the previous administration, three of Moon’s initial picks to be ministers failed last year under heightened scrutiny.

"We believe that in these trying times -- with elevated global financial market turmoil, growing U.S. trade protectionism and geopolitical tensions on the Korean peninsula -- the president choose continuity over tradition," Kwon Young-sun, an economist for Nomura International, wrote in a report.

Lee said in a news conference that he was honored to be reappointed, but that compared with four years ago, instead of happiness he felt a greater sense responsibility to navigate the difficulties the economy faces. He said the decision demonstrates the government’s support for the central bank’s independence.

While the BOK is nominally independent, monetary policy has often faced political pressures.

"Reappointing Lee despite changes in administration is like a big experiment, and has laid the foundation for monetary policy independence," said Kim Jin-ill, a Seoul-based professor of economics at Korea University and a former economist at the Federal Reserve.

To contact the reporters on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net, Hooyeon Kim in Seoul at hkim592@bloomberg.net.

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Henry Hoenig

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