The Bank of Korea Takes Action on Errors Ranging from '1/5 to 2 Times'... "Will Disclose Reasons for Failure" [Kang Jin-kyu's BOK Watch]

'The Bank of Korea Takes Action on Errors Ranging from '1/5 to 2 Times'... "Will Disclose Reasons for Failure" [Kang Jin-kyu's BOK Watch]

According to the Bank of Korea, the GDP for the third quarter was recorded at 0.1% (quarter-on-quarter). Both the preliminary figure released at the end of October and the revised figure announced earlier this month were the same. This was only one-fifth of the 0.5% quarterly forecast made by the Bank of Korea in August.

In the first quarter, GDP jumped to 1.3%. At that time, there was no official figure as quarterly forecasts were not made, but it was internally expected to be around 0.5-0.6%. The actual performance was more than double the forecast.

As such, with alternating surprises and shocks in growth rates, criticisms of 'failed economic forecasts' have been raised, especially in political circles.

On the 25th, the Bank of Korea announced in its '2025 Monetary Credit Policy Operation Plan' that it would enhance the quality of forecasts through in-depth analysis of such economic forecast errors. The Bank of Korea stated, "To enhance the effectiveness of monetary policy, we will strengthen internal and external communication," and "We will improve the accuracy of economic forecasts and increase explanations to economic agents."

To improve the accuracy of economic forecasts, it was stated that "considering the increased domestic and international uncertainties, we will develop leading indicators and expand microdata to closely monitor the economic situation."

The plan is to strengthen the analysis of economic forecast errors that have been frequently pointed out this year. The core is to analyze the reasons for the errors and publicly announce them. The Bank of Korea stated, "We will announce the analysis of forecast errors every November."

Until now, when the Bank of Korea's Research Bureau announced economic forecasts in February, May, August, and November, the Economic Statistics Bureau would initially explain the items with errors in April, July, October, and the following January when quarterly GDP figures were released. Subsequently, the Research Bureau would provide additional explanations at the next forecast announcement. However, there were criticisms that the reasons for errors were not found in a short period or that explanations were insufficient due to focusing on future forecasts.

In the first quarter, the initial mentions were mainly about the effects of the new Samsung Galaxy product launch and warm weather, but later, the rapid increase in government fiscal execution and consumption around the general election was suggested as reasons for the surprise. In the third quarter, the slowdown in exports was pointed out as a factor lowering the growth rate. Over time, the focus is shifting from temporary slowdowns to structural contractions.

With this measure, if a place is established to analyze and explain errors every year, it is expected that market participants will be able to understand the reasons for forecast failures in more detail, and the Bank of Korea's forecasting ability will improve.

To strengthen communication, the Bank of Korea emphasized that it would increase the external activities of the Monetary Policy Committee members. This year, three press conferences with Monetary Policy Committee members were held, and the messages from the committee members in charge of major reports were disclosed three times. There were also three external lectures. The plan is to increase these activities next year.

The improvement of conditional interest rate forecasts within three months is also being pursued. Currently, Monetary Policy Committee members express their opinions on how interest rates will be three months after the monetary policy direction meeting. It is known that the Bank of Korea is considering expanding the forecast horizon to six months.

For next year's monetary policy, the focus was on downward pressure on growth and domestic and international uncertainties. The Bank of Korea stated, "Considering the increased downside risks to the economy due to increased political uncertainty, intensified global competition in key industries, and changes in the trade environment, we will further lower the base rate."

Additionally, "It is necessary to be mindful of the impact of changes in major countries' monetary policies on exchange rate volatility," and "While closely examining risk factors in the domestic foreign exchange sector, we will implement additional stabilization measures against excessive volatility," it emphasized.

Kang Jin-kyu josep@hankyung.com