Seo Young-kyung, KOREA'S BOK Monetary Policy Committee Member, "Housing Prices Must Be Considered in Monetary Policy Operation... Supports ECB Approach"

Seminar on "Korean Economic Outlook and Monetary Policy Challenges" by the Korea Chamber of Commerce and Industry on the 29th

Seoyoungkyung, a member of the Monetary Policy Committee of the Bank of Korea, is giving a lecture on "Korean Economic Outlook and Monetary Policy Tasks" at the Korea Chamber of Commerce and Industry on the 29th.

Current Base Interest Rate Level Still Considered 'Accommodative'

[Asia Economy Reporter Kim Eunbyeol] Seo Young-kyung, a member of the Monetary Policy Committee at the Bank of Korea, evaluated the current base interest rate level as 'still accommodative' and stated that the timing and pace of further rate hikes will be adjusted by balancing the economic recovery and household debt. She also expressed the opinion that active discussions are needed on incorporating housing prices into future monetary policy operations. This implies that additional rate hikes may be necessary.

On the afternoon of the 29th, Seo attended the 'Korean Economic Outlook and Monetary Policy Challenges Seminar' held at the Korea Chamber of Commerce and Industry, stating, "Even after the rate hike in August, the current monetary policy stance is still considered accommodative." She explained, "Despite the rate hike, household debt and housing prices continue to rise sharply, which is due to the still low funding costs and the added expectation of rising housing prices caused by a shortage of jeonse (long-term lease) and housing supply." Seo further explained that the real long-term interest rate derived from expected inflation (based on the 3-year government bond yield) has remained negative, and the real long-term interest rate based on consumer prices is estimated to have fallen to negative levels this year.

She forecasted that South Korea's economic growth rate this year and next will exceed the potential level (just above 2%), and the GDP gap is expected to turn positive in the first half of next year. Given that the degree of financial imbalance in South Korea is severe compared to other countries and there is optimism about economic recovery, the negative impact of a preemptive adjustment of the base interest rate is expected to be limited. Seo added, "Going forward, the timing and pace of additional rate hikes should be determined by balancing macroeconomic and financial conditions."

She particularly noted that an unprecedented amount of money was injected in response to the COVID-19 crisis, and since the housing price rise has continued longer than expected, monetary policy should be conducted with consideration of housing prices.

Seo said, "Since the COVID-19 pandemic, many major countries have explicitly considered housing prices in their monetary policy operations as housing prices have risen for a prolonged period," citing the European Central Bank (ECB), the Reserve Bank of New Zealand, and Norges Bank as examples. She emphasized, "Each country has different methods, but I support the ECB's approach of including owner-occupied housing costs in the consumer price index."

Source: Bank of Korea

In July, the ECB decided to include owner-occupied housing costs in the Harmonized Index of Consumer Prices (HICP) and is currently revising the index. Currently, the consumer price index in the Eurozone only includes rents, but including owner-occupied housing costs could push the price index higher. Since reflecting housing prices would raise inflation, central banks could use this as a basis for raising interest rates. In South Korea, owner-occupied housing costs are not included in the Consumer Price Index (CPI), leading to concerns about distortion in the inflation measure.

Seo stated, "Including owner-occupied housing costs in the CPI could also ease the conflict between the central bank's goals of price stability and financial stability," adding, "When housing prices are high, financial imbalances worsen through household debt, requiring active central bank responses. If the CPI is underestimated, it results in underreaction, but including owner-occupied housing costs would raise inflation, enabling the central bank to respond more actively."

However, Seo strongly opposed explicitly including housing policy objectives in the central bank's mandate. She said, "Monetary policy goals cannot target the price of specific goods," and added, "Since real estate is influenced by various factors such as policies and supply, including uncontrollable policy goals is not appropriate."

Meanwhile, New Zealand added a clause to its central bank mandate in March requiring the assessment of the impact of government housing policies. New Zealand is a country where housing prices have surged significantly, ranking first in Bloomberg's 'House Price Bubble Rankings.' Norway also expresses through monetary policy statements that housing price trends are given significant consideration in policy decisions.

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