[Q&A] Lee Ju-yeol: "1% Inflation Rate Not a Level to Worry About Inflation"

Long-Short Term Interest Rate Spread Higher Than in the Past
"Major Countries Legally Ban Central Banks from Directly Purchasing Government Bonds"

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] On the 25th, Lee Ju-yeol, Governor of the Bank of Korea, stated, "An inflation rate in the 1% range is not a cause for concern regarding inflation."

Governor Lee said at a press conference following the Monetary Policy Committee meeting that day, "We are forecasting this year's consumer price inflation rate to be in the 1% range. The upward revision of the inflation forecast reflects not only supply-side factors such as the sharp rise in oil prices but also the economic recovery trend."

The Bank of Korea's Monetary Policy Committee adjusted this year's consumer price inflation forecast from 1.0% to 1.3%, an increase of 0.3 percentage points. The inflation forecast for next year was lowered from 1.5% to 1.4%.

The following is a Q&A with Governor Lee.

▲ Regarding the recent inflation debate that started in the United States, do you agree with the opinion that "current inflation is good inflation"?

= Those concerned about inflation point out that the large-scale economic stimulus measures by the new U.S. administration could lead to significant inflation. On the other hand, some argue that while the inflation rate may temporarily rebound due to past base effects, the possibility of sustained expansion is low. Due to COVID-19, it seems it will take time for full demand recovery. However, it is necessary to be cautious about the possibility of rising prices. If restrictions on economic activities are eased, suppressed consumption could erupt in a short period.

▲ Inflationary pressure is rising due to the increase in raw material prices. How do you evaluate this?

= There are three factors behind the sharp rise in raw material prices. First, expectations for global economic recovery have increased. Next are supply-side difficulties such as poor crop yields due to abnormal weather, disruptions in some raw material mining, and production cuts by the Organization of the Petroleum Exporting Countries (OPEC). Another factor is the expansion of risk asset preference due to accommodative monetary policies by global central banks. It is necessary to observe whether the upward trend in international raw material prices will continue.

▲ You did not revise the Korean economic growth forecast this time. How much have the government's 4th disaster relief fund and vaccine distribution been reflected?

= We accepted the government's quarantine authorities' plan that herd immunity will be achieved by November this year through vaccination. The supplementary budget, including the 4th disaster relief fund, has not been reflected because the expenditure details have not yet been finalized.

▲ Recently, there are concerns that the Korean economy might fall into a liquidity trap, leading to prolonged low interest rates and low inflation.

= The slow pace of economic recovery is not due to falling into a liquidity trap but rather because economic activities have not normalized due to the unprecedented shock of COVID-19. Low inflation also has structural factors such as aging population and the expansion of online transactions, in addition to economic factors.

▲ The spread between the 3-year government bond and the base interest rate has exceeded 0.5 percentage points, widening the long- and short-term interest rate gap.

= The widening of the long- and short-term interest rate gap is common among major countries. In particular, the long-term interest rate in the U.S. has become a significant factor. The new U.S. administration is pursuing active fiscal stimulus, which has raised inflation expectations and significantly increased long-term interest rates. It is difficult to definitively judge whether the current level is acceptable. However, compared to the period after the global financial crisis, the recent spread appears somewhat high. If market interest rates rise sharply, debt burdens will increase mainly for vulnerable borrowers, and volatility in asset markets such as stocks may also increase, so we are monitoring the situation.

▲ There are expectations in the market for systematizing simple purchases of government bonds.

= The Bank of Korea has been purchasing government bonds to stabilize the market when long-term market interest rates become temporarily unstable due to supply-demand imbalances. Last year, purchases amounted to about 11 trillion won. This year, if necessary, the timing, scale, and frequency of government bond purchases will be announced in advance. However, this is a preemptive response to volatility in long-term interest rates and differs from the regular asset purchase policies of some countries.

▲ What is the reason for clearly stating the Bank of Korea's recent stance against direct purchases of government bonds?

= According to Article 75 of the Bank of Korea Act, the Bank of Korea is allowed to directly acquire government bonds. This law, enacted in 1950, permits financing through the issuance power. At that time, the government's fiscal and revenue base was very weak, and the government bond market was underdeveloped. Now, the government's finances have become quite sound, and the government bond market has developed. Most major countries prohibit direct acquisition by central banks by law, and China also bans it. If Korea were to directly acquire government bonds now, it could raise concerns about fiscal soundness.

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