Bank of Korea Monetary Policy Committee expresses concern over 'Jeonse crisis'... urges active expression on fiscal issues

Minutes of the Bank of Korea Monetary Policy Committee Meeting

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[Asia Economy Reporter Kim Eunbyeol] The Financial Monetary Policy Committee of the Bank of Korea also expressed concerns about the recent surge in jeonse prices. With the prolonged COVID-19 pandemic, expansive government fiscal policies are inevitable, but the Bank of Korea revealed its concerns about how to align its independent stance with government policies.

Bank of Korea: "Jeonse Price Instability to Persist for a While"... Monetary Policy Committee: "Jeonse Loan Closely Monitored"

According to the 'Minutes of the 22nd Monetary Policy Committee Meeting in 2020 (held on October 14)' released by the Bank of Korea on the 3rd, many committee members expressed opinions on the instability of jeonse prices. One committee member stated, "Jeonse prices are not only a socially sensitive issue comparable to sales prices but also highly connected to the macroeconomy and financial sectors," emphasizing the need for close monitoring of related trends. In particular, they pointed out, "The rise in jeonse prices increases housing costs, affecting the consumer price inflation rate, and also acts as a factor increasing jeonse loans, highlighting household debt issues."

In response, the relevant department at the Bank of Korea answered that while the housing sales market has seen a decrease in transaction volume and a slight slowdown in price growth, the jeonse market has experienced a significant increase in price growth due to concerns about supply-demand imbalance. They added that such jeonse price instability is likely to persist for a while until concerns related to supply and demand subside.

Since most jeonse loans are guaranteed loans, there was also an opinion that this issue could be viewed beyond household debt repayment capacity to include government fiscal burden concerns. It implies that the issue is more deeply related to the repayment capacity of guarantee institutions rather than that of households. One committee member emphasized, "Jeonse loans are expected to continue increasing," and added, "It is necessary to consider how to view and evaluate jeonse loans from the perspectives of potential loan defaults and repayment burdens."

There was also a point made that despite a decrease in jeonse transaction volume, the continuous increase in jeonse loans is ultimately related to the rise in jeonse prices. The Bank of Korea's relevant department responded that considering the recent expansion of the upward trend in jeonse prices and the relatively low interest rates compared to other loans, the increase in jeonse loans is expected to continue steadily unless transaction volume decreases significantly. There was also advice that various micro-level analyses are needed regarding the sharp rise in jeonse prices, such as examining jeonse transaction trends segmented by transaction price ranges.

"Need to Find Ways to Cooperate on Fiscal Policy While Maintaining Bank of Korea's Independence"

Concerns were also revealed about the effects of the government's expansive fiscal policy and how the Bank of Korea can cooperate with government policies while maintaining central bank independence. Due to the impact of COVID-19, expansive fiscal operations are inevitable next year as well, and harmonious implementation of fiscal and monetary policies is expected to be more important.

One committee member stated, "Since the impact of fiscal policy on financial markets and the real economy has greatly expanded compared to the past, it is necessary for the Bank of Korea to more actively express its opinions on fiscal issues." Another member, after asking about the impact of the government's supplementary budget and other emergency measures on domestic growth, urged, "In a situation where continuous expansion of fiscal deficits is expected, while ex-post policy coordination is important, the Bank of Korea should take more interest and proactively express opinions in advance to ensure fiscal spending is executed in a way that contributes more significantly to economic growth."

There was also an evaluation of the fiscal rules announced by the government. One committee member said, "Some view the government's fiscal rules as soft rules with considerable discretionary aspects, while others criticize that establishing fiscal rules is not timely in a situation requiring active fiscal expansion," emphasizing, "It is necessary to pay close attention to the fiscal rules and the surrounding controversies and clarify our position."

"Caution Against Short-term Financial Market Shocks from Unexpected Situations After U.S. Election"

Meanwhile, a committee member asked about the impact of the U.S. presidential election results starting on the 3rd (local time). The relevant department responded, "In financial markets, rather than the election results themselves, there is caution about the possibility that unexpected situations occurring after the election could cause short-term shocks to the financial markets." Currently, the likelihood of Democratic candidate Joe Biden's victory is gaining weight, but since the vote count is expected to be delayed, the market is wary of uncertainty.

Regarding the timing for recovering to pre-COVID-19 levels of economic growth, the Bank of Korea predicted, "Based on the August forecast, it is expected that the level of the fourth quarter of last year can be recovered within next year."

Meanwhile, the committee members unanimously decided to keep the base interest rate at a historic low of 0.50% per annum. This decision was based on the judgment that it is necessary to maintain accommodative monetary policy as the COVID-19 situation continues to prolong.

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