[Q&A] Lee Chang-yong "Premature Stimulus Only Raises House Prices... Next Year's Growth Rate Not Below 2.1%"

"Inflation to Reach 2% Level by Late Next Year to Early Following Year"
"Sufficiently Long Tightening Until Inflation Target Achieved"
"Growth Rate in 2% Range Not Low, No Stimulus Needed"
"Minimal Impact of Hong Kong ELS Market, Social Issue"

Bank of Korea Governor Lee Chang-yong is answering questions at the monetary policy direction press conference held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 30th. (Photo by Bank of Korea)

Lee Chang-yong, Governor of the Bank of Korea, predicted that the inflation rate will reach the target level of 2% around the end of next year or early 2025. He also stated that the current tightening stance will be maintained for at least six months or more.

Governor Lee also evaluated the downward revision of next year's economic growth forecast to 2.1%, a 0.1 percentage point decrease from August, as "not too low." He emphasized, "Premature stimulus measures are undesirable as they can only raise real estate prices."

Governor Lee made these remarks during a press conference held after the Monetary Policy Committee meeting on the 30th.

He said, "We predict that the inflation rate will converge to the 2% range by the end of next year or early 2025," adding, "On the other hand, the U.S. is expected to reach that level in the mid to late 2025."

Governor Lee explained, "We will maintain the tightening stance long enough until we are confident that the inflation rate converges to the target level," and added, "Realistically, it will be longer than six months."

This can be interpreted to mean that the base interest rate cut can only be considered when U.S. inflation stabilizes in the mid to late next year and interest rate cuts begin, or when domestic inflation clearly converges to 2% in the second half of the year.

According to Governor Lee, among the six Monetary Policy Committee members excluding himself, two expressed the opinion that "it is appropriate to maintain the base interest rate at the current level," while the remaining four expressed the view that "the possibility of additional rate hikes should be kept open."

One Monetary Policy Committee member who had suggested "keeping the possibility of rate cuts open" at the October meeting withdrew this opinion at this meeting, as some uncertainties such as risks in the Middle East had been partially resolved.

Regarding the 2.1% growth forecast for next year, Governor Lee explained that it is not a particularly low level compared to other countries.

He emphasized, "It is not desirable to introduce stimulus measures and lower interest rates because the growth rate is too low," adding, "If done prematurely, it could only raise real estate prices. We should maintain the tightening stance and address growth issues through structural adjustments."

Below is a Q&A with Governor Lee

Lee Chang-yong, Governor of the Bank of Korea, is answering questions at the Monetary Policy Direction press conference held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 30th. (Photo by Bank of Korea)

- Recently, as Agustin Carstens, General Manager of the Bank for International Settlements (BIS), mentioned, there is an assessment that most central banks have finished raising interest rates. Is the Bank of Korea also concluding rate hikes and shifting to a prolonged high-interest rate phase? Were there any Monetary Policy Committee members at this meeting who thought additional rate hikes would be necessary within the next three months?

▲All six Monetary Policy Committee members agreed today to freeze the base interest rate and maintain it at this level for a sufficiently long period to observe whether the inflation rate converges to the target level. However, regarding whether it is necessary to raise the rate further to 3.75%, two of the six members excluding myself expressed the opinion that "it is appropriate to maintain the base rate at the current level." On the other hand, four members expressed the view that "the possibility of additional hikes should be kept open" due to upward revisions in the inflation path, the persistence of cost-push effects, and remaining uncertainties related to future international oil prices. Carstens' comments mostly relate to major countries, and there are differing opinions in Korea about the end of rate hikes.

- Expectations are growing that the U.S. will cut interest rates sooner. How do you evaluate this?

▲I am aware that there are opinions in the market that not only the U.S. but also the U.K. might soon start a rate-cut cycle. However, after attending BIS meetings and talking with central bank governors, it seems the market is moving ahead, but the governors do not think so. Good communication is necessary to reduce such volatility.

-During the period when the base rate was frozen this year, inflation fluctuated significantly. Some argue that with inflation rising too high, the real base interest rate has become less tight. Do you still consider the stance tight?

▲The recent inflation increase was mostly influenced by agricultural products and oil prices. We expect it to decline from 3.8% over the next two to three months. Since this is a temporary phenomenon in the short term, it does not change the view on whether the stance is tight or not. Looking at the financial conditions index over about a year, the market is actually tighter than last year. Also, signs of consumption slowing and real estate price adjustments indicate that the base rate is sufficiently tight.

-Looking at the growth forecast, it shows the low 2% range for next year and the year after. Is low growth becoming entrenched?

▲This year's 1.4% forecast is below Korea's potential growth rate of 2%. Next year, the growth rate is expected to be above 2%, so it is above potential growth, and the GDP gap is narrowing. While the U.S. and advanced countries are expected to see growth decline next year after good growth this year, Korea's trend is upward, so I do not consider a growth rate above 2% to be bad.

-In the recent monetary policy statement, the phrase "maintain the tightening stance for a considerable period" was changed to "maintain it for a sufficiently long period." Usually, "considerable period" is interpreted as about six months. Is "sufficiently long period" longer than that?

▲I do not want to specify "several months." Realistically, it seems longer than six months, but it could be six months or less; we do not know. We avoided the phrase "considerable period," which could cause misunderstanding, to mean that we will maintain the tightening stance long enough until we are confident that inflation converges to the target level.

Lee Chang-yong, Governor of the Bank of Korea, is attending the Monetary Policy Direction Decision Meeting of the Monetary Policy Committee held at the Bank of Korea in Jung-gu, Seoul on the 30th. Photo by Joint Press Corps

-You mentioned that Korea's inflation target convergence will be somewhat earlier than the U.S. Is this outlook still valid? How do you see the timing of inflation convergence to 2% for both countries?

▲All predictions are conditional. We expect inflation to converge to the 2% range by the end of next year or early 2025. In contrast, U.S. forecasting agencies expect convergence in mid to late 2025. The U.S. core inflation rate is about 1 percentage point higher than Korea's, so the speed of decline may differ. This is about one to one and a half years ahead, so it may change as data changes.

-In today's revised forecast, inflation expectations were raised while the base rate was held steady. Can this be interpreted as not prioritizing inflation?

▲There are various ways to stabilize inflation. Raising rates is one, and maintaining a tight stance for a long time is another. Although inflation expectations were raised, whether to raise rates or maintain the current level depends on various factors. It is not appropriate to judge that raising rates means prioritizing inflation and not raising means otherwise. Inflation expectations rose due to oil price increases after the Hamas war and unexpectedly high agricultural prices due to summer weather. The medium- to long-term path of declining inflation is not significantly different from what we expected. It is just about a month delayed from our initial forecast. We are not scientists, so a one-month delay is unavoidable.

-The market expects that even if the Bank of Korea lowers rates in the future, corporate production costs will rise and market interest rates will not fall, leading to a 'medium inflation, medium interest rate' era becoming entrenched. How do you evaluate this?

▲Due to climate change, reducing carbon usage increases corporate costs, and global fragmentation requires supply chain restructuring. This raises costs, leading to a general price level higher than the past decade, which is being discussed worldwide. Some suggest raising the inflation target to 3% and increasing the neutral interest rate. However, this is not a major consideration for 1-2 years of monetary policy but a medium- to long-term issue.

-You said inflation convergence to 2% is expected by the end of next year or early 2025, similar to previous forecasts. Although this year's and next year's inflation forecasts have risen, is there little difference in the timing of convergence?

▲We expected inflation to bottom out in July, rise slightly in August and September, then fall. However, it temporarily spiked due to agricultural products and oil prices. These price increases are expected to disappear, but since inflation is coming down from a high level, the average inflation level has risen. Still, there is little difference from the August forecast regarding convergence to 2%.

-Next year's growth forecast was lowered, and inflation forecast raised. Do you expect next year to be more challenging than this year?

▲Of course, inflation will remain high next year, and financially vulnerable groups exist, so it will be very difficult. However, a 2% growth rate for the whole country is not too low. It is not desirable to introduce stimulus measures and lower rates because growth is too low. Premature actions could only raise real estate prices. The current situation requires maintaining a tightening stance and addressing growth issues through structural adjustments.

-To achieve the Bank of Korea's forecasted annual growth rate of 1.4%, the fourth quarter must see 0.7% growth. The market expects this to be difficult. How do you evaluate this? Also, the OECD raised Korea's growth forecast for next year to 2.3% the day before, while the Bank of Korea lowered it. What accounts for this difference?

▲There is still a month left, but I believe achieving 1.4% as per the Bank of Korea's forecast is possible. I appreciate the staff's accurate forecasting, which also helps the Bank's credibility. The export rebound was delayed, causing concern, but fortunately, IT has performed well recently, enabling 1.4% growth.

Looking at the OECD announcement, the U.S. and China, Korea's major trading partners, have growth forecasts about 0.1% higher than ours. The OECD seems to expect better exports than we do. Our 2.1% growth forecast for next year is not optimistic. If exports do well, growth can rise, and I hope exports perform well even if we are wrong. I would prefer people to focus on assumptions rather than just percentages.

-Household credit in the third quarter hit a new record high again. There is no sign of resolving the household debt problem.

▲I hope people judge by how much the household debt-to-GDP ratio decreases by the end of this government. Globally, corporate debt is often resolved through restructuring, but finding cases of smooth household debt adjustment is difficult. Also, household debt should be viewed by ratio, not absolute amount.

-There are mixed views in the market about the U.S. economic situation. What is your assessment of the U.S. economy next year?

▲Views on the U.S. economy have changed continuously, but recently data has been very good, and inflation is falling quickly, so the market seems to expect a soft landing. I think the U.S. economy is doing so well that it is almost worrisome. Last year, this was troublesome because the U.S. raised rates aggressively due to high inflation, affecting our exchange rate. This year, many expect the U.S. central bank to end hikes, so the exchange rate impact is less. Rather, high U.S. growth is good for our exports. So, I hope the U.S. economy achieves a soft landing.

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Direction Decision Meeting of the Monetary Policy Committee held on the 30th at the Bank of Korea in Jung-gu, Seoul. Photo by Joint Press Corps

-There are concerns that real estate project financing (PF) issues will escalate significantly after next year's general election. How do you assess the current real estate PF situation?

▲At the end of last year, there were many concerns that a rapid drop in real estate prices could burden financial institutions. Looking at the apartment transaction price index, it fell about 20%, then rose 5-6%, and now remains about 14% below the peak. If it stays at this level, risks from price declines are much reduced. However, high interest rates will continue, increasing burdens. Real estate PF is not yet a stage to be reassured. If some small construction companies face problems due to high rates, restructuring will be necessary one by one. I hope this year will be a time to steadily sort things out.

-One Monetary Policy Committee member had suggested keeping the possibility of rate cuts open. Did that member withdraw the opinion?

▲I asked the member who previously suggested keeping the possibility of cuts open, and they withdrew that opinion. Previously, due to the worsening Hamas war and potential growth decline, they suggested keeping both hikes and cuts open. Now, recognition of the end of U.S. tightening has solidified, and the Middle East conflict is not expanding as neighboring countries do not want it to. The international financial market has stabilized. Therefore, the need to keep the possibility of cuts open has greatly diminished, leading to withdrawal.

-Regarding the recent issue with Hong Kong equity-linked securities (ELS), there are expectations that securities firms and distributors will face large losses starting January next year. Is this a financial stability risk?

▲The Financial Services Commission and Financial Supervisory Service are monitoring the situation. From our discussions, it seems more likely to be a problem between financial institutions and consumers due to mis-selling rather than a financial stability issue. We checked the potential impact on short-term funding and bond markets if such problems arise and judged that it is unlikely to significantly affect the market. However, social issues like mis-selling cannot be ruled out, and that is beyond my scope to comment on.

-You attend the so-called 'F4 (Finance 4)' meetings every weekend (with Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho, Governor Lee Chang-yong of the Bank of Korea, Financial Services Commission Chairman Kim Ju-hyun, and Financial Supervisory Service Governor Lee Bok-hyun). There are concerns that the Bank of Korea is becoming synchronized with the government. What is your view?

▲People say the Bank of Korea is influenced when it meets the government, but why don't they think the Bank influences the government? Why don't they ask if the government's independence is lost? If the Bank has good ideas and keeps communicating, the government will listen. The Bank positively influences the government, and we also receive many inputs from the government. The Monetary Policy Committee makes independent decisions.

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