Lee Ju-yeol "Growth Rate May Fall Below -1%... Housing Price Increase Slows Down" (Comprehensive)

Bank of Korea Report to National Assembly's Planning and Finance Committee

Significant Downward Revision of Growth Rate Inevitable, Employment Outlook Also Negative
"Monetary Easing Policy Did Not Only Inflate Asset Prices... Positive Effects Are Significant"
"Emergency Disaster Relief Fund Needed... Payment Method and Recipients Must Be Carefully Considered"

[Asia Economy Reporter Kim Eun-byeol] Lee Ju-yeol, Governor of the Bank of Korea, said on the 24th, "As the domestic spread of the novel coronavirus infection (COVID-19) has resurged, the uncertainty of the future economic flow has increased significantly." He added that there is a possibility that this year's economic growth rate could record a negative 1% range, and that the growth forecast could be significantly revised downward.

At the National Assembly's Planning and Finance Committee briefing on the same day, Governor Lee stated, "Although the domestic economy, which had worsened significantly due to the spread of COVID-19, showed signs of some improvement, the recent resurgence of COVID-19 is expected to weaken the recovery trend." He also diagnosed that globally, the spread of COVID-19 has not been easily contained, and global economic uncertainty remains high.

V-shaped rebound out of reach... "Possibility of -1% growth rate not excluded"

Before the recent resurgence of COVID-19, the domestic economy showed signs of improvement as export and consumption slumps eased. However, due to the recent spread of COVID-19, the expected 'V-shaped rebound' is unlikely to materialize. In May, the Bank of Korea projected this year's economic growth rate at -0.2%, but the growth forecast will be revised downward on the 27th. In the worst case, there is a forecast that the growth rate could fall to as low as -2.0%. Regarding employment, Governor Lee said, "Since March, the number of employed persons has sharply decreased, especially in the service sector with a high proportion of face-to-face operations," adding, "Employment improvement in industries heavily affected by the COVID-19 shock is slow, and with continued sluggishness in manufacturing and construction sectors, the future employment situation is expected to show a weak trend."

When Rep. Choo Kyung-ho of the United Future Party asked whether he sees the growth rate possibly going as low as -0.8% or even into the -1% range despite optimistic views this year, Governor Lee replied, "We need to review the numbers a bit more," but added that the forecast might need to be lowered significantly from the May projection of -0.2%, and that the possibility of -1% is not excluded. Regarding the worldwide COVID-19 confirmed cases increasing much more than expected, he said, "It has increased considerably more than anticipated," and added, "The more important factor is how economic quarantine measures are implemented."

In response to Rep. Jung Il-young of the Democratic Party's question about the extent of the downward revision of the growth rate, he said, "It will have to be lowered significantly." However, when asked whether a growth rate in the -1% range might be difficult, he drew a line, saying further review is needed.

Money injected into the market only went to real estate and stocks?

Lawmakers attending the briefing also pointed out that the money injected by the Bank of Korea was concentrated only in real estate and other areas, fueling price increases. Rep. Hong Ik-pyo of the Democratic Party said, "Although the Bank of Korea implemented easing policies, the phenomenon that appeared was the rise in stock and real estate prices," adding, "Banks only lend money to creditworthy entities that do not need to spend money, and do not lend to small and medium-sized enterprises or startups that actually need funds, leading to a vicious cycle where money does not circulate."

Rep. Ko Yong-jin of the Democratic Party also said, "Only multi-homeowners have the capacity to consume, leading to active economic activity, but tenants are closing their wallets," and added, "The effect of quantitative easing is going to the real estate and stock markets, and the Bank of Korea should consider that positive effects are not occurring."

On the 19th, the government decided to lower the jeonse-to-monthly rent conversion rate from the existing 4% to around 2.5%. Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, stated at the related ministers' meeting on real estate market inspection that the current 4% conversion rate could accelerate the trend toward monthly rent and increase the burden on tenants, leading to this decision. The photo shows a real estate brokerage office in Jamsil, Seoul on the same day. Photo by Moon Ho-nam munonam@

However, Governor Lee said, "When COVID-19 rapidly spread in March, the positive function of quantitative easing clearly appeared in the crisis situation where companies could not raise funds in the financial market," adding, "It is true that there are side effects such as asset price increases, but I believe the positive effects of monetary easing policies were greater." He also noted that after the government's high-intensity real estate measures, the price increase trend has slowed as of August.

Concerns were also raised that the Bank of Korea might decide interest rates because of real estate prices. Rep. Yoon Hee-sook of the United Future Party said, "In 2018, then Prime Minister Lee Nak-yeon said in the National Assembly that interest rates should be moved, and the Bank of Korea's Monetary Policy Committee actually raised rates, which makes me wary," adding, "Some say interest rates should be raised, but as someone who studied economics and distinguishes between macro and microeconomics, interest rates should not be set by looking at the real estate market." Governor Lee drew a line on raising interest rates, saying, "Because concerns about the real economy are currently high, accommodative monetary policy is inevitable." In response to Rep. Seo Byung-soo of the same party, Governor Lee emphasized, "Interest rates are decided by the Monetary Policy Committee together after looking at the macroeconomic situation," and confidently stated, "Interest rate decisions are unrelated to the government."

Need for a second emergency disaster relief fund? Is expansionary fiscal policy appropriate?

Governor Lee said that the measure to provide the first emergency disaster relief fund was necessary. He said, "Because the COVID-19 shock had a greater impact on low-income groups, I acknowledge that the government's partial supplementation was necessary." In response to Rep. Ki Dong-min of the Democratic Party's question about his opinion on providing a second emergency disaster relief fund, he answered accordingly, adding, "Since household income conditions are unlikely to improve in the third quarter, I personally think measures to compensate for income shocks are necessary."

However, he added that detailed considerations are needed regarding the recipients and methods of payment. Governor Lee said, "I think the consumption stimulation effect and fiscal sustainability related to the second emergency disaster relief fund payment should be considered together." This can be interpreted as recognizing the purpose of the second relief fund payment while emphasizing selective support considering fiscal conditions.

A notice indicating the availability of emergency disaster relief funds related to the novel coronavirus infection (COVID-19) is posted at a store in Myeongdong, Seoul. Photo by Mun Ho-nam munonam@

Governor Lee also remarked that Korea's current fiscal situation is still stable but that long-term fiscal soundness management is necessary. Opinions on expansionary fiscal policy are divided between the ruling and opposition parties. Rep. Kim Soo-heung of the Democratic Party asked during the briefing, "Everyone has different thoughts on how to manage fiscal policy, but I think consumption should be generated to increase investment and income," and inquired about Governor Lee's view.

In response, Governor Lee said, "At this stage, it is necessary to utilize fiscal policy, and in the long term, fiscal soundness should be maintained." He added, "I think the government currently has the capacity to take active measures, but managing stability in the long term is a different matter."

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