[Q&A] Lee Ju-yeol: "Monetary and Fiscal Policies Are Not at Odds"

Considering Economic Recovery and Financial Imbalances, 'Monetary Policy Normalization'
"Sustained Oil Price Increase Acts as an 'Upside Risk'"

[Image source=Yonhap News]

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] Lee Ju-yeol, Governor of the Bank of Korea, responded to criticisms that the normalization of the accommodative monetary policy stance is at odds with the government's fiscal policy by stating, "Monetary and fiscal policies do not necessarily have to be conducted in the same direction and with the same intensity."

Governor Lee made these remarks on the 24th during a briefing on the results of the price stability target operation review. He said, "As stated in the Bank of Korea Act, harmonious operation between monetary and fiscal policies is necessary," adding, "Monetary and fiscal policies do not necessarily mean operating in exactly the same direction and with similar intensity." He emphasized, "During the COVID-19 recovery process, monetary and fiscal policies acting complementarily is not a constraint but a desirable policy operation."

The following is a Q&A with Governor Lee.

▲You forecast that next year's consumer price inflation rate will fall to the 1% range. Does this weaken the rationale for raising interest rates?

=The current low interest rate level was set when the COVID-19 crisis hit last year, and inflation was close to 0%. The degree of easing is adjusted according to economic conditions, so normalizing interest rates in line with the recovery is a natural process, as I have explained before. There is a clear concentration of funds in asset markets, and household debt is still increasing significantly. It is increasingly necessary to operate monetary policy with attention to financial imbalances. Neglecting financial imbalance responses will inevitably have a very large negative impact on the economy and inflation in the medium term over time.

▲Recently, the Bank of Korea stated that 'raising the base rate once or twice cannot be considered tightening,' but there are market forecasts, especially in the bond market, that two rate hikes could occur before your term ends.

=We have clearly stated our policy direction to orderly normalize monetary policy from an appropriate point this year. Since then, various predictions about the timing and number of hikes have emerged in the market. The timing and pace of normalization this year will ultimately depend on our economic conditions, recovery trends, inflation, the degree of financial imbalance progression, and the recent concerns about the spread of COVID-19 variants. We are continuously monitoring these situations and believe we should start normalization at a timely point. The gap between market interest rates and the base rate is influenced not only by our monetary policy direction but also by overseas interest rate trends, supply and demand conditions, and various other factors. It is difficult to evaluate market expectations based solely on the 85 basis points. After announcing the policy to normalize interest rates, we have said we will communicate closely with the market to minimize shocks to economic agents. We will make continuous efforts to narrow the gap if it is excessive or if our message is not sufficiently conveyed, considering the spread between the 3-year government bond yield and the Bank of Korea base rate.

▲There is controversy over the mismatch between the accommodative monetary policy normalization stance and the government's fiscal policy.

=Basically, I always say that harmonious operation between monetary and fiscal policies is necessary. The degree of harmonious operation can vary depending on macroeconomic conditions. Sometimes the term monetary-fiscal policy coordination is used, but I believe this does not necessarily mean operating in exactly the same direction and with similar intensity. Monetary policy is operated based on macro conditions, and I think the direction monetary policy should take is to eliminate the side effects of prolonged low interest rates according to the degree of economic improvement. Fiscal policy is uneven across sectors, so focusing support on vulnerable groups and sectors that enhance productivity in preparation for the post-COVID-19 era is a desirable complementary combination of monetary and fiscal policies.

▲Do you think the annual consumer price inflation rate could exceed 2%?

=As the economic recovery accelerates, demand-side inflationary pressures are increasing. On the supply side, the price rise of agricultural and livestock products has lasted longer than initially expected. Recently, international oil prices have also exceeded $70, surpassing the levels forecasted a month ago. Oil prices have a significant impact on domestic inflation, so if the upward trend in oil prices continues, the upside risk to inflation compared to the initial forecast could be greater.

▲It seems difficult to achieve the 2% inflation target through monetary policy alone.

=Besides interest rates, structural factors at the global level and government policies have a significant effect on inflation. Many factors influence inflation, so achieving the inflation target with interest rates alone is not easy. However, we consider the 2% level appropriate and will continue to strive to pursue this target as much as possible in monetary policy operations.

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