Lee Ju-yeol and Hong Nam-ki "Monetary easing adjustment, fiscal policy maintains current stance" (Comprehensive)

Hong Nam-ki and Lee Ju-yeol "Fiscal and Monetary Policy Mutual Complementarity is Desirable"
First Solo Meeting in 2 Years and 7 Months... Efforts to Defuse 'Policy Discord' Controversy

Lee Ju-yeol, Governor of the Bank of Korea (left), is exchanging greetings with Hong Nam-ki, Deputy Prime Minister for Economic Affairs, during a meeting held on the morning of the 2nd at the Press Center in Jung-gu, Seoul.

[Asia Economy Reporter Eunbyeol Kim] The government and the Bank of Korea have decided to maintain the current stance on fiscal policy for the time being, while adjusting the degree of monetary easing. Amid recent indications from the Bank of Korea about a possible interest rate hike within the year, the government has explained the controversy over the 'policy mismatch' as it continues to inject funds through supplementary budgets.

On the 2nd, Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki and Bank of Korea Governor Lee Ju-yeol held a breakfast meeting at the Seoul Press Center and stated, "Although the economy is recovering rapidly, in a situation where risks such as uneven recovery across sectors, polarization, and financial imbalances are latent, a precise coordination and role-sharing between fiscal and monetary policies is more important than ever." This was their first meeting alone in about two years and seven months since Deputy Prime Minister Hong took office in December 2018.

Deputy Prime Minister Hong and Governor Lee agreed that fiscal policy should maintain its current course for the time being, while monetary policy needs to adjust the degree of easing according to improvements in the economic situation. Fiscal policy aims to compensate for the damage to growth potential and consumption capacity caused by the COVID-19 shock and help vulnerable sectors feel the economic recovery, while monetary policy should adjust the degree of easing to reduce side effects such as the accumulation of financial imbalances due to prolonged low interest rates.

Both sides evaluated the current economic situation as showing a "fast and strong recovery." However, they noted that the recovery speed is uneven across sectors and potential risk factors remain. This is why monetary policy, which affects all sectors equally, will adjust the degree of easing, while fiscal policy will be maintained for the time being.

The government and the Bank of Korea assessed that exports and investment will continue to drive a solid economic recovery, but face-to-face services and employment have not yet fully recovered, so difficulties in the livelihood economy, such as job and income reductions among vulnerable groups, persist.

Another reason for the need to adjust monetary policy is the growing capital inflow into asset markets such as real estate and stocks due to the prolonged ultra-low interest rate stance for over a year. Easy borrowing at low interest rates has caused asset prices to soar, and household debt has grown to 1,765 trillion won, increasing the risk of financial imbalances.

Both sides emphasized, "Going forward, the government and the Bank of Korea will communicate frequently through various forms of opinion exchange and cooperate closely to respond to the highly uncertain situation."

Meanwhile, Deputy Prime Minister Hong and Governor Lee confirmed the need for cooperation between the government and the Bank of Korea to maximize national interests at the upcoming G20 Finance Ministers and Central Bank Governors Meeting starting next week, and discussed related agendas. They highlighted ▲strengthening the global health system ▲enhancing communication among G20 countries ▲restoring global supply chains and trade systems as important issues.

They also agreed to respond in unison to issues such as resource allocation for crisis response and debt relief for low-income groups, which are being discussed mainly by international financial organizations like the International Monetary Fund (IMF). Regarding major issues in international tax investigations, they stated, "We will actively express opinions to derive reasonable international tax principles."

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