[Q&A] Lee Chang-yong: "Real Estate Prices Are Not Going to Rise Soon... It's Too Early for Interest Rate Cuts"

Lee Chang-yong, Governor of the Bank of Korea, is speaking at a briefing session on the status of inflation targeting held at the Bank of Korea in Jung-gu, Seoul, on the afternoon of the 19th. (Photo by Bank of Korea)

Lee Chang-yong, Governor of the Bank of Korea, emphasized that while interest rate cuts could be considered if there is evidence that the year-end inflation rate converges to the 2% range, it is premature to discuss rate cuts at this time as it is necessary to observe whether the rate moves into the 3% range.

Governor Lee made these remarks on the afternoon of the 19th at a press briefing held at the Bank of Korea headquarters in Jung-gu, Seoul, reviewing the status of the inflation stabilization target operation and explaining the future inflation outlook and monetary policy direction.

Regarding Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho's recent pressure to lower ramen prices, Governor Lee said, "Since raw material prices have dropped significantly, I see it as a political statement asking companies to share the pain accordingly."

Earlier, Deputy Prime Minister Choo appeared on KBS Sunday Diagnosis the day before and said, "Ramen prices were raised significantly in September and October last year, but the current international wheat price has dropped by about 50% compared to then," adding, "I hope companies lower prices appropriately in line with the drop in wheat prices." This effectively means the government pressured companies to reduce prices.

Governor Lee also commented on the recent slight recovery in the real estate market and the increase in household loans, stating, "It is necessary to manage so that household debt does not increase further in the long term," but also said, "It is premature to say that the real estate market is recovering."

Below is the Q&A session with Governor Lee, Deputy Governor Kim Woong, and Director Choi Chang-ho of the Research Department

On the afternoon of the 19th, a briefing session on the status of price stability target operations was held at the Bank of Korea in Jung-gu, Seoul. (Photo by Bank of Korea)

- You mentioned that the inflation rate is likely to be in the 2% range in June and July compared to the same months last year. Do you expect it to rise back to the 3% range starting in August?

▲(Director) There is a high possibility that the headline inflation rate will be in the 2% range in June and July. Last year, international oil prices surged in the first half, causing petroleum prices to rise, but recently inflation has shown a relatively stable trend, which is the cause. (However) we assumed that inflation would rise in the second half compared to the first half because we see China's reopening as an upward factor for international oil prices. This is a factor that will raise inflation after August. Therefore, inflation is expected to fall in June and July and then rise again, moving around 3% by the end of the year.

▲(Governor) We expect the long-term inflation rate to stabilize slightly above 2%. If inflation deviates significantly from our expected path in the second half, policy responses may be necessary, but so far, there are no signs of that.

- Australia and Canada have raised interest rates again as core inflation rises. If core inflation rebounds in Korea, could we do the same?

▲(Governor) Core inflation is expected to remain rigid for the next 2-3 months and then decline, but whether it will rebound afterward remains to be seen. Regarding whether a rate hike would follow if core inflation rebounds, I can only answer in principle. In the cases of Australia and Canada, inflation and core inflation rates exceeded 5%, so the situation is different from Korea.

- The U.S. Federal Reserve (Fed) suggests in its dot plot that it may cut rates by the end of next year. The Bank of Korea's stance is that there will be no rate cuts until there is confidence that inflation converges to the target level. When do you think it will be possible to judge whether inflation converges to the target next year?

▲(Governor) We are not yet prepared to express an opinion on the interest rate level one year from now. If there is evidence by the end of the year that inflation sufficiently converges to the 2% target, we may consider rate cuts, but at this time, we need to observe whether inflation moves into the 3% range. It is premature to discuss rate cuts.

- There is an analysis that the government is shifting the focus of economic policy in the second half from inflation stabilization to economic response. What is your position on concerns that pressure for rate cuts may increase? Also, do you think policy coordination between the Bank of Korea and the government will continue well in the second half?

▲(Deputy Governor) We maintain the view that the economic outlook will show a 'low in the first half and high in the second half' trend. There are signs of slight improvement in exports to China and semiconductor exports, which had been poor. The idea that the government is shifting the focus to economic response seems to be only in the media and has not been confirmed.

▲(Governor) Regardless of the economic situation, policy coordination between the government and the Bank of Korea is very good and is expected to continue well.

- Recently, the won-dollar exchange rate has fallen, and the won-yen exchange rate has entered the 800-won range. The Deputy Prime Minister mentioned the Korea-Japan currency swap. Is a currency swap necessary when the won is not weak?

▲(Governor) The Korea-Japan currency swap can be discussed more as part of normalizing international relations and economic cooperation between Korea and Japan rather than for economic reasons. Even if it is not for exchange rate stability, I think it has symbolic importance as a sign that economic relations between the two countries, including economic exchanges and corporate investments, have been restored.

Choi Chang-ho, Director of the Research Department at the Bank of Korea, is speaking at a briefing session on the status of inflation targeting held at the Bank of Korea in Jung-gu, Seoul, on the afternoon of the 19th. (Photo by Bank of Korea)

- Public service inflation is low at the 1% level. Is the government suppressing inflation? Also, how should we view Deputy Prime Minister Choo Kyung-ho's mention of lowering ramen prices yesterday?

▲(Governor) When inflation rises rapidly, every country manages prices of essentials and other items. When inflation rose rapidly last year, the government inevitably managed prices of certain items through supply and demand adjustments. Energy prices have also risen less compared to overseas. There are benefits from this, but it can cause government fiscal problems. It is not sustainable in the long term and should gradually normalize. The request to lower ramen prices comes at a time when inflation has recently fallen significantly worldwide, and companies' profit margins have increased a lot. It is interpreted as a political statement asking companies to share the pain accordingly since raw material prices have dropped significantly.

- Do you see the increase in household loans in April and May as a short-term phenomenon?

▲(Governor) We are watching carefully the increase in household and real estate loans. Despite significantly higher interest rates, recent increases in household loans are being observed to determine whether they are a short-term phenomenon due to government support measures or if they are becoming a trend again. If there is a risk that household debt increase becomes a trend, not only the Bank of Korea but also the Ministry of Economy and Finance and others must manage to prevent further increases.

- The Fed's dot plot assumes two more rate hikes this year. Does the Bank of Korea's view on the Fed's rate outlook change?

▲(Governor) The Fed said it would raise rates about twice more, but the market seems to think about once. Whether it will be twice is uncertain. Previously, we assumed one hike was certain, and two hikes are new information. We need to watch what pattern the Fed will show. We do not mechanically follow the Fed's rate decisions. There are many variables, including the impact on exchange rates, capital flows, and various factors in Korea.

- If household loans increase due to rising housing prices in the future, will there be changes in the Bank of Korea's core inflation outlook?

▲(Governor) At the end of last year and early this year, there were concerns about a hard landing in real estate. Real estate prices fell 15-17% last year but have recently shown signs of slowing decline. During this process, real estate collateral loans have increased mainly in the banking sector. It is premature to say that household loans are increasing and the real estate market is recovering at this point. It does not seem to be a situation where real estate prices will rise quickly.

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