[Q&A] Lee Ju-yeol "If the economy is as expected, considering an additional base rate hike in November"

October Monetary Policy Committee Holds Base Interest Rate Steady at 0.75% per Annum

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] The Bank of Korea kept the base interest rate at 0.75% per annum on the 12th. This was due to the slowdown in the economic recovery trend caused by the fourth wave of the COVID-19 pandemic and the expansion of financial volatility. However, Lee Ju-yeol, Governor of the Bank of Korea, expressed his intention to consider an additional rate hike in November if the economic trend continues as expected.

The following is a Q&A with Governor Lee.

- Possibility of a rate hike in November.

▲ The decision on the interest rate and whether to make additional adjustments will be made comprehensively considering the economy, inflation, and financial stability. When the rate was raised in August, we said we would gradually adjust the degree of monetary easing according to the extent of economic improvement. We will examine how changes in domestic and external conditions affect the domestic economy and inflation, and whether the economic recovery trend deviates from our expectations. If the economic trend proceeds as we anticipate, we believe an additional base rate hike can be considered at the November meeting.

- There are opinions that the authorities’ total volume regulation and the Bank of Korea’s interest rate response should be implemented together to achieve the household debt growth target of the 6% range. What is the central bank’s role regarding household debt growth?

▲ The Bank of Korea’s basic role is to promote financial imbalance correction and price stability. I would like to emphasize that we do not target specific asset prices or markets. To alleviate financial imbalances, macroprudential policies play a primary role. Despite strengthened macroprudential measures, risk appetite among economic agents and profit-seeking behavior through excessive borrowing have not subsided. Even if macroprudential regulations are further strengthened, if expectations persist that low interest rates will continue for a considerable period, the effectiveness will inevitably be somewhat limited. In the current situation where financial imbalances are worsening, I believe monetary policy also needs to respond alongside macroprudential policies.

- There are concerns about stagflation (rising prices amid economic recession).

▲ Looking at external conditions, global supply disruptions are lasting longer than expected. As a result, various commodity prices, especially energy prices, are rising sharply. The China Evergrande crisis and power shortages have generally increased external risk factors. Accordingly, volatility in domestic financial markets, including interest rates and stock prices, has expanded significantly. However, considering that foreign bond funds continue to flow in, we judge that external risk impacts are not viewed as highly concerning by outside observers. Regarding stagflation, it is a supply-side issue caused by rising raw material prices and production disruptions. While demand is rapidly recovering after the pandemic, supply-side factors are also at play. We view this as different from typical stagflation. Although inflationary pressures in Korea have recently increased, since the growth rate is exceeding the potential growth rate, we do not consider it a situation of concern.

- Is the recent weakening trend of the Korean won a cause for concern?

▲ Recently, the won-dollar exchange rate has risen somewhat faster than major currencies. The reasons include the visible tapering by the U.S. Federal Reserve, the China Evergrande Group crisis, continued high energy price increases, which have led to expanded offshore NDF purchases and increased domestic investors’ overseas investments, reflecting both domestic and international supply and demand factors. The exchange rate rise raises concerns about import price increases and consumer price inflation. On the other hand, despite increased external uncertainties, Korea’s CDS premiums, borrowing spreads, and spreads remain stable. Changes in major countries’ monetary policies, including the U.S. Federal Reserve, are also anticipated. Given the high external uncertainties due to China’s credit risk and rising energy prices, we will monitor the situation carefully and plan to stabilize the market if necessary.

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