[2021 National Audit] Lee Ju-yeol "Monetary Policy Normalization in Line with Changes in Financial and Economic Conditions"

Review of COVID-19 Situation, Inflation, Financial Imbalances, and Major Countries' Monetary Policy Changes
Partial Temporary Support Measures Also Returning to Normal
Preparing for the 'Post-COVID Era' with Aging, Climate Change, and Digital Transformation

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] On the 15th, Lee Ju-yeol, Governor of the Bank of Korea, announced the future direction of monetary and credit policy operations, stating, "We plan to adjust the degree of monetary policy easing in line with improvements in financial and economic conditions." Following the Bank of Korea's maintenance of this year's domestic gross domestic product (GDP) growth forecast in the 4% range on the 12th, there is an analysis that the base interest rate is likely to be raised in the future.

In his opening remarks at the Bank of Korea's audit by the Planning and Finance Committee on the same day, Governor Lee said, "The timing of additional adjustments to the base interest rate will be determined by closely examining the developments of COVID-19, changes in growth and inflation trends, financial imbalance situations, and changes in major countries' monetary policies."

Exports are showing favorable performance, but inflationary pressures and financial imbalance issues are worsening. Household debt has significantly increased during the COVID-19 response process, with the household debt-to-GDP ratio rising to 105.6% in the second quarter of this year, and the gap with the long-term trend expanding to 5.3 percentage points. Consumer prices have recorded a 2% range increase for six consecutive months through September (2.5%), raising concerns about inflation.

If the future growth trajectory does not deviate from the expected path and the side effects of low interest rates intensify, an interest rate hike will be inevitable.

Governor Lee also stated, "We will pay close attention to the possibility of significant volatility in financial markets and continuously improve loan support systems for vulnerable sectors."

The Bank of Korea established a special purpose vehicle (SPV) for purchasing corporate bonds and commercial papers (CP) to facilitate funding for low-credit companies struggling due to the prolonged COVID-19 pandemic, and extended its operation period until the end of the year in June.

Governor Lee emphasized the need to prepare for the economic environment of the post-COVID era, including climate change and digital transformation.

He stressed, "We will explore desirable policy measures from multiple angles to respond to economic environmental changes that will become more prominent in the post-COVID era, such as climate change and the transition to a digital economy."

Accordingly, the Bank of Korea plans to review the status of South Korea and major countries regarding climate change response and digital transformation, and propose alternatives for fostering new industries and promoting the transition to a low-carbon economic structure. In particular, concerning climate change, the Bank intends to comprehensively examine the impact on price and financial stability and consider central bank-level response measures.

Meanwhile, the Bank of Korea announced that it will complete research related to the issuance of digital currency (CBDC) next year to establish a foundation for CBDC introduction. It also added that efforts to ensure the safety of the payment and settlement system, such as establishing an effective monitoring system for new payment service providers like big tech companies, will continue.

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