How Long Will the Record Low Base Interest Rate Last?… Lee Ju-yeol: "Until Economic Crisis Recovery" (Summary)

Lee Ju-yeol, Governor of the Bank of Korea, 70th Anniversary Commemorative Speech
"Appropriate Use of Non-Interest Rate Policies When Necessary"
"Caution Against Side Effects of Prolonged Low Interest Rates"

[Asia Economy Reporter Kim Eun-byeol] Lee Ju-yeol, Governor of the Bank of Korea, expressed his intention to keep the benchmark interest rate at the historic low level of 0.50% per annum for the time being. This decision is based on the judgment that an accommodative monetary policy is necessary until the economic damage caused by the novel coronavirus disease (COVID-19) recovers.

In his speech commemorating the 70th anniversary of the Bank of Korea on the 12th, Governor Lee stated, "It is necessary to operate monetary policy accommodatively until our economy is expected to emerge from the crisis and show signs of recovery." He added, "To maintain financial market stability and smooth credit flow, policy tools other than interest rates should also be appropriately utilized when necessary," and "We will closely cooperate with the government to maximize policy effectiveness." This means maintaining the benchmark interest rate at the historically low level and utilizing new monetary policy tools if needed.

New tools include ▲Quantitative Easing (QE ? purchasing government bonds to stabilize long-term interest rates) ▲Yield Curve Control (YCC ? controlling upper and lower limits of long-term government bond yields) ▲Forward Guidance (preemptive communication of monetary policy direction). Governor Lee’s remarks on this day also effectively signaled to the market that accommodative policies will continue "until the economy shows signs of recovery."

Governor Lee’s comments align with those of Jerome Powell, Chair of the U.S. Federal Reserve (Fed), who said on the 10th (local time), "We are not even thinking about raising interest rates," and "We plan to maintain the current interest rate level until we are confident that recent conditions have been overcome and employment and price stability goals can be achieved."

The commemorative speech also included reflections on how far the role of the central bank can be expanded. He said, "While the basic principle is that the central bank exercises its note-issuing power, which is the property of the people, prudently, the argument that it should take a more active role as a 'crisis fighter' is gaining strength." He emphasized the need to reach a social consensus by considering how far to accept demands for the 'quasi-fiscal role of the central bank,' how to secure legitimacy, and how to establish principles for market intervention.

Lee Ju-yeol, Governor of the Bank of Korea, is delivering a commemorative speech for the 70th anniversary of the Bank of Korea at the Bank of Korea in Jung-gu, Seoul, on the 12th.

However, he added that the side effects that may arise from the prolonged low-interest-rate environment should be guarded against. He said, "In the medium to long term, we must not lower our guard against the possibility of accumulating financial imbalances." This is due to concerns that excessive liquidity could lead to increased debt and asset price bubbles. He stated, "We have repeatedly seen cases where the accumulation of financial imbalances has triggered crises," and "Once the crisis subsides, we should also prepare in advance for ways to gradually normalize these exceptional measures."

Meanwhile, Governor Lee expressed concerns that the global value chain (GVC) could weaken and the free trade order could be significantly shaken as a result of this crisis. With the acceleration of the Fourth Industrial Revolution and intensifying global competition, he predicted that imbalances in various economic sectors such as ▲the dual structure of the labor market ▲income polarization ▲accumulation of debt could worsen.

He said, "Unless we move beyond the past growth paradigm that relies on physical capital, we will not be able to escape low growth even after overcoming the crisis," and added, "The best way to prepare for the post-COVID era is to establish a productivity-driven growth system based on knowledge and technology by actively fostering private autonomy and creativity."

He also expressed his intention to consider ways to improve the inflation targeting system amid the ongoing low-interest-rate and low-inflation environment. Governor Lee said, "We need to advance research on how to improve the monetary policy operating system while closely monitoring the discussion trends of major central banks." On the 9th, the Bank of Korea announced 'BOK 2030,' which includes improvements to the monetary policy operating system, research on central bank digital currency (CBDC), enhancement of research capabilities, and innovation of management and personnel systems.

This content was produced with the assistance of AI translation services.