Lee Ju-yeol "Inflation in mid-0% range but maintaining price stability target system"

Bank of Korea 'Price Stability Target Operation Status Review Press Briefing'

Lee Ju-yeol, Governor of the Bank of Korea, is speaking at the Price Stability Target Operation Status Review Briefing and Year-end Press Conference held at the Bank of Korea in Jung-gu, Seoul, on the afternoon of the 17th.

[Asia Economy Reporter Kim Eunbyeol] The Bank of Korea has decided to maintain its inflation stabilization target (2%) and continue with the current operation method of the inflation targeting system. Despite the consumer price inflation rate expected to remain in the mid-0% range this year, significantly below the target due to the impact of the COVID-19 pandemic and other factors, changing the operation method could instead cause greater uncertainty. The forecast that consumer price inflation will rise to around 1% next year is also a reason for maintaining the existing approach.

On the 17th, Bank of Korea Governor Lee Ju-yeol stated at the "Inflation Targeting System Operation Status Review Press Briefing," "From January to November this year, consumer prices rose by only 0.5% compared to the same period last year, falling well short of the inflation stabilization target." He explained, "The low inflation rate in the mid-0% range this year, following last year's 0.4%, is due to a sharp decline in international oil prices caused by the spread of COVID-19, as well as weakened demand-side inflationary pressures, which significantly slowed the rise in personal service prices." He also noted that government policies such as the expansion of free high school education and support for mobile communication fees contributed to downward pressure on prices.

However, Governor Lee said, "Next year, domestic and international economies are expected to improve, and international oil prices are anticipated to rise. Additionally, the downward pressure on prices from government policies will gradually diminish, leading to consumer price inflation rising to around 1%. Against this backdrop, we have decided to maintain the current operation method of the inflation targeting system."

One reason the Bank of Korea decided to maintain the inflation targeting system is the expectation that inflation will gradually approach the target as the COVID-19 spread subsides. Furthermore, economic uncertainty has increased due to the pandemic, and changing the operation method amid such circumstances could increase uncertainty. Governor Lee said, "The recent decline in inflation rates is a phenomenon commonly observed in major countries such as the United States and Europe. Except for the U.S. Federal Reserve (Fed), other countries are maintaining their existing inflation targeting systems, which was also taken into consideration."

However, he mentioned that the Bank is closely examining the limitations of the inflation targeting system in light of structural economic changes. Chronic demand shortages are occurring due to population aging, domestic and external imbalances, and uncertainties, resulting in a lack of demand recovery even when policy interest rates are lowered. Changes in the labor market structure and technological innovation have also weakened the relationship between employment and inflation.

Governor Lee pointed out that under these circumstances, central banks would need to lower policy interest rates more significantly to achieve inflation targets, but the scope for this is limited as major countries' policy rates are already low. He also mentioned the widening gap between the real economy and asset prices amid the ongoing low-interest-rate environment, stating, "The recent pace of housing price increases is excessive compared to income growth rates and real economic conditions, so we are monitoring this with concern, paying attention to financial imbalances."

Meanwhile, Governor Lee expressed his full agreement with the basic intent of the proposed amendment to the Bank of Korea Act, which adds employment stabilization as a purpose of the Bank of Korea. However, he noted, "Adding the responsibility for employment stabilization will indeed bring considerable difficulties in the actual conduct of monetary policy," and added, "I hope that the optimal solution will be sought as discussions proceed, mainly in the National Assembly."

He also added, "In that process, we will actively participate in related discussions by referring to cases from major countries and broadly collecting opinions from external experts."

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