Bank of Korea Governor's Conviction: "Potential Growth Rate Must Reach 2%... Structural Reform Depends on People and Politics"

Lee Chang-yong, Governor of the Bank of Korea, Holds Press Conference in Morocco
On Korea's Inevitable 0% Growth, Calls It a "Conservative View"
Upcoming Monetary Policy Meeting Also Focuses on "Core Inflation, a Critical Concern"
Also Quotes Milton Friedman's 'The Shower Room Fool'

Lee Chang-yong, Governor of the Bank of Korea, indicated that South Korea's potential growth rate should be maintained at around 2% in the long term. Although pessimistic views prevail that growth will be in the 0% range due to low birth rates and aging population, he emphasized that instead of accepting this as is, structural reforms are necessary to escape low growth. To achieve this, he called for reforms in sectors such as the labor market, employment of women and foreigners, and education, without relying on fiscal and monetary policies.

Bank of Korea Governor Lee Chang-yong is answering questions during a luncheon meeting with reporters on the 12th (local time) in Marrakech, Morocco. Photo by Marrakech Joint Press Corps

"Is 0% Growth Inevitable for Korea? ... Too Passive a View"

On the 12th (local time), during a meeting with accompanying reporters in Marrakech, Morocco, Governor Lee responded to the remark that "there are talks about having to accept Korea's low growth" by saying, "We are considering Korea's potential growth rate to be around 2%," and questioned, "Why should we accept the common view that potential growth will decline due to aging as a given?"

He continued, "While 3-4% growth is difficult, large countries like the U.S. still achieve 2% growth, so thinking that Korea must inevitably have 0% growth like Japan is too passive a view," adding, "If reforms such as labor market reform, knowledge enhancement, promotion of competition, and utilization of women and foreign workers are implemented, I want to set the potential growth rate target above 2%. That is how we will develop."

Regarding solutions to raise the potential growth rate, he said, "We know exactly how to escape low growth," but added, "The problem is that the stakeholders differ. If structural reforms are made, the growth rate will rise to the 2% range, and the choice depends on the people and politics." Governor Lee had previously pointed out after the Monetary Policy Committee meeting in May that "structural reforms including labor, pensions, and education are necessary to solve low growth."

However, he reiterated that it is not desirable to use fiscal and monetary policies to escape low growth. Governor Lee explained, "Ask those currently running businesses. The reason the economy is struggling is more due to the labor market than interest costs," and described it as "a structural problem of having no workers and no young people." He further elaborated, "Our economic growth problem should be solved structurally, not with fiscal measures."

Greatly Increased Oil Price Uncertainty: "Core Inflation Is a Matter of Utmost Concern"

He was extremely reserved about the potential impact of the Israel-Palestine war on the domestic economy and inflation scenarios due to soaring oil prices. This is a geopolitically sensitive topic and could influence the Monetary Policy Committee meeting scheduled for the 19th. Governor Lee said, "The Middle East issue happened while I was on the plane," and added, "It occurred suddenly, and since we need to review new data, it will be a challenging fact for the committee members when making decisions."

He stated, "We think the inflation rate will fall to the low 3% range by the end of this year and converge to around 2% by the end of next year," but cautioned, "There is significant uncertainty about how oil prices will move going forward." He also noted, "For the Bank of Korea, the utmost concern in upcoming meetings is whether core inflation will follow the expected path or rise higher when oil prices fluctuate."

Regarding concerns that the U.S. Federal Reserve might raise benchmark interest rates further due to the Middle East war, he said, "Whether the U.S. will raise rates or not is something to watch," but added, "If rates are raised once more, it will have some impact on price variables, but our market is already anticipating that to some extent."

In response to some criticism that the release of $6 billion (about 8 trillion won) of Iran's frozen oil payments in South Korea last August enabled Iran to support Hamas, he firmly stated, "The U.S. Treasury Department's position is that this is an unfounded claim."

"It’s Not Good to Tighten Loan Regulations When Raising the Base Rate"

During the meeting, the "shower fool" debate also took place. The "shower fool" refers to a person who, when cold water comes out, turns the faucet to hot water, and when it gets hot, turns it back to cold water repeatedly. It is a metaphor for governments and monetary authorities that intervene prematurely in economic issues. This expression was introduced by Milton Friedman, a former University of Chicago professor and Nobel laureate in economics.

Governor Lee was asked whether he was disappointed by the government's easing of real estate loan regulations, given the monetary authorities' desire to reduce debt. He firmly replied, "No." He explained, "It is not good to tighten loan regulations when raising the base interest rate," and added, "In the shower, people adjust the temperature little by little to avoid switching between hot and cold water repeatedly, but it seems like people outside are saying it suddenly got hot or cold."

The phrase "adjusting the temperature little by little" means that while the Bank of Korea rapidly raised the base rate, financial authorities eased loan regulations to mitigate side effects such as credit tightening for ordinary citizens. Governor Lee explained that if both the Bank of Korea and financial authorities had focused solely on debt reduction, rapid debt reduction like a "shower fool" who suddenly turns on hot water would have occurred.

Regarding criticism that the 50 trillion won liquidity supply after the Legoland incident at the end of last year was an excessive measure preventing restructuring, he countered, "More than 10% of businesses were cleaned up by creditors," and said, "This is an orderly restructuring."

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