Lee Ju-yeol "Normalization of Monetary Policy, Key Focus in the Second Half... Asset Imbalance Worsens"

Ijuyeol, Governor of the Bank of Korea
71st Anniversary Commemorative Address

[Image source=Yonhap News]

"Expansionary economic stimulus measures have led to widening imbalances between sectors and social strata"

"Significant increase in private debt scale, rising concerns over global inflation"

"Adjustment of expansionary crisis response policies is essential for sustainable growth of our economy"

"Orderly normalization of monetary policy is a key focus for the second half of the year"

[Asia Economy Reporter Kim Eun-byeol] Lee Ju-yeol, Governor of the Bank of Korea, has addressed the side effects of ultra-low interest rates and other economic stimulus measures. Since the COVID-19 outbreak, the ultra-low interest rate of 0.50% per annum has been maintained for over a year, during which household debt has far exceeded the size of the Gross Domestic Product (GDP). Governor Lee also mentioned this issue, revealing a hawkish (monetary tightening preference) stance. Earlier, immediately after the Monetary Policy Committee (MPC) meeting last month, he stated, "We should not rush the normalization of interest rates, but we must not delay either," and added, "We will maintain an accommodative stance for the time being." This can be interpreted as indicating that interest rates may be raised in the near future if the current economic recovery trend continues.

In his '71st Anniversary Speech of the Bank of Korea' on the 11th, Governor Lee said, "Our economy is recovering from the COVID-19 shock faster than expected, and the economic recovery is expected to become more evident in the second half of the year," adding, "Bold economic stimulus measures unprecedentedly implemented by governments and central banks worldwide have greatly helped overcome the crisis, but it is also true that imbalances between sectors and social strata have widened in the process."

He confirmed that while the ultra-low interest rate policy and government financial support helped the economy recover quickly from COVID-19, there are also side effects caused by the unprecedented monetary expansion. He stated, "As economic agents' risk-taking tendencies have strengthened, asset prices have risen rapidly compared to the real economy, resulting in intensified asset inequality. Moreover, the scale of private debt has greatly expanded, and recently concerns over global inflation have increased." According to the Bank of Korea, household debt reached a record high of 1,765 trillion won as of the end of the first quarter this year, nearly matching the GDP size. As of last year, the household debt-to-disposable income ratio, which indicates households' debt repayment ability, surged by 12.5 percentage points year-on-year to 200.7%. The increase last year was the largest in the past decade.

The sharp rise in household debt is partly due to self-employed individuals and vulnerable groups affected by COVID-19 seeking living expenses, but a significant factor was the widespread tendency to borrow easily to invest in real estate, stocks, and cryptocurrencies. This trend of borrowing to invest led to rapid increases in real estate and stock prices, resulting in widening gaps not only in income but also in assets. When the scale of debt-financed investment grows large, it not only deepens imbalances but also risks destabilizing the financial system if shocks hit the asset markets. Therefore, experts advise responding with interest rate hikes before the debt scale grows further.

Governor Lee also emphasized the need to carefully manage policies going forward to sustain economic and employment recovery while preventing the accumulation of imbalances. He said, "We must guide funds flowing into asset markets toward productive sectors and manage economic agents' leverage at stable levels," adding, "Appropriately adjusting the expansionary crisis response policies in line with improvements in financial and economic conditions is an essential process for the stable and sustainable growth of our economy."

As a priority for the second half of the year, Governor Lee identified "orderly normalization of the current accommodative monetary policy from an appropriate time," assuming the Korean economy continues its solid recovery. The Bank of Korea projects Korea's growth rate this year at 4.0%, and with the first quarter's real GDP (provisional) growth rate at 1.7%, the annual growth rate is expected to exceed 4.0%. He stated, "We must carefully assess the COVID-19 developments, the strength and sustainability of the economic recovery, and the risks of accumulated financial imbalances to determine the timing and pace of adjusting the degree of accommodation," adding, "We will communicate sufficiently with economic agents in advance so that they can prepare without shocks during this process."

Additionally, Governor Lee stressed the need to continue policy efforts to prepare for the post-pandemic era, mentioning ▲ transition to a green economy ▲ the Fourth Industrial Revolution. As countries compete to lead related industries by riding the global economic trends, Korea must expedite reforms of its industrial structure and regulatory system to secure competitive advantages. He emphasized, "Whether we seize this trend as an opportunity for a new leap through creating new growth engines or not will determine whether a great divide between countries and companies will emerge in the near future." He also highlighted the importance of fostering conditions where private sector innovation capabilities can lead to productivity improvements and job creation.

He also pledged to maintain continuous stability in financial and foreign exchange markets. Given that volatility in domestic and international financial markets may increase due to changes in global inflation and expectations regarding major countries' monetary policies, he said the Bank of Korea will closely monitor market risk factors and take timely market stabilization measures if necessary. He committed to actively responding to changes in the payment and settlement environment. With the acceleration of digital transformation, the need to introduce Central Bank Digital Currency (CBDC) may increase, and the Bank will prepare thoroughly. The Bank plans to start CBDC pilot testing in the second half of the year to evaluate its functions and usability. Recognizing climate change as a new form of financial risk, the Bank will also intensify research on its impacts and response strategies.

Meanwhile, Governor Lee stated, "As public expectations for the Bank of Korea's role grow, we must enhance the organization's flexibility and expertise to effectively fulfill our responsibilities amid rapidly changing environments." Last year, with the help of a professional consulting firm, the Bank began diagnosing its organizational culture, and this year it is preparing a mid- to long-term management and personnel innovation plan that includes fundamental improvements across the organization and personnel. Governor Lee noted, "Employees' perceptions of the internal organizational culture and management methods, which have long been based on social environments and customs, are changing significantly," adding, "We must improve work practices and organizational culture and innovate management and personnel systems in line with changing times." He also emphasized, "Voluntary participation of employees is essential to promote management and personnel innovation."

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