Ideal Type Han, Deputy Governor, "Low Possibility of Interest Rate Cut in the First Half of the Year" [Q&A]

Bank of Korea Announces 'Monetary and Credit Policy Report'

(Photo by Bank of Korea)

The Bank of Korea emphasized that there will be no change in the policy stance, such as a base interest rate cut, during the first half of the year. It stated that household loan flows are being managed stably, and risks such as real estate project financing (PF) are not expected to cause systemic risks overall in the future.

Lee Sang-hyung, Deputy Governor of the Bank of Korea, said at a press briefing on the 'Monetary and Credit Policy Report' on the 14th, "Overall, household loans are showing a stable trend." He mentioned that the role of policy finance, such as the Newborn Special Loan, is not only to increase household loans but also has a dual effect of preventing a hard landing in the housing market.

He assessed that the recent sharp rise in agricultural product prices does affect economic agents' inflation perceptions but is not enough to impact the overall inflation trend. He also evaluated that the recently introduced stress Debt Service Ratio (DSR) can improve the qualitative aspect of household debt.

Below is a Q&A with Deputy Governor Lee Sang-hyung.

- Policy finance accounted for a large portion of household loan growth last year. Do you see policy finance as the main cause of the increase in household loans?

▲ The household loan growth rate in the financial sector last year was only 0.7%. Overall, household loans are stable. The household debt-to-GDP ratio has also decreased. However, household loans increased somewhat from mid-last year’s second half, partly due to increased housing market transactions after February-March last year. Policy finance also played a part. But the role of policy finance should not be viewed only as increasing household loans; its role in helping to prevent a hard landing in the housing market should also be considered.

- To what extent will policy finance, such as the Newborn Special Loan, affect household loans this year?

▲ The Newborn Special Loan has been introduced this year, but its scale is expected to decrease compared to last year. We will monitor the situation as conditions change.

- The Newborn Special Loan was implemented as one of the solutions to low birth rates. It could also be a factor hindering a soft landing in real estate. What is your view on addressing the low birth rate issue through real estate support measures?

▲ The low birth rate is undoubtedly a national challenge. However, there can be various opinions on how to approach it. We also see it as a very important task. We are conducting several recent surveys and studies. We agree that if there is a part where the financial sector can contribute, it should do so. I think it is necessary for the government and financial authorities to approach this in a way that does not significantly contribute to the increase in household debt.

- You diagnosed that "future housing price declines could increase credit risk expansion centered on vulnerable groups." How severe is the potential expansion of credit risk?

▲ There is a separate Financial Stability Committee on this matter, and I will address it at their press briefing. Broadly speaking, there are some latent risks in the financial market, such as real estate PF. It is a factor to watch with caution, but we judge it is not enough to cause systemic risk. How credit risk develops in the future will depend on how policy authorities respond. Regarding real estate PF, practical restructuring efforts by relevant policy authorities are necessary. For the non-bank sector, it is important to enhance loss absorption capacity and secure response capabilities.

- Recent evaluations by major investment banks (IBs) suggest that Korea could be the first Asian country to cut interest rates.

▲ As clearly stated at the February Monetary Policy Board meeting, the basic stance is to maintain a tightening policy until there is confidence that the inflation rate will converge to the target level. Based on economic forecasts, it seems unlikely that interest rates will be cut in the first half of the year. In the second half, we will assess how to proceed by reflecting various changes in conditions.

- To what extent do agricultural product prices affect inflation?

▲ (Bang Hong-gi, Head of Policy Planning Department) There was research showing that in the early stages of high inflation, prices of some items that economic agents directly feel are excessively influenced by perception. In the U.S., gasoline prices were notable, while in Korea, prices of agricultural products and other grocery items do have an impact. However, we believe it is not enough to affect the overall inflation trend.

- What inflation instability factors are you most carefully monitoring going forward?

▲ (Bang Hong-gi, Head of Policy Planning Department) Geopolitical risks have not disappeared, so we need to watch these factors. Inflation stabilization can be viewed from various perspectives, but the biggest risk remains that expected inflation is not stable or that shocks in one area could spread to others.

▲ The general public’s perception of inflation remains high at the high 3% range. The proportion of respondents expecting inflation to approach the target level in the future is still low compared to the past. Fundamentally, despite recent factors such as rising agricultural product prices, we think consumer prices will gradually decline in trend.

- It is stated that the year-end Consumer Price Index (CPI) is expected to be in the low 2% range. Does this mean the timing of entering the low 2% range has been delayed compared to previous forecasts?

▲ (Choi Chang-ho, Director of Monetary Policy Bureau) It is not significantly different from the February economic forecast. The forecast remains that the CPI will be in the low 2% range at year-end and early next year, and generally converge to the target level in the first half of next year. There is no major change from previous forecasts.

▲ Based on the current February forecast, it is correct to say that there is almost no possibility of a policy stance change in the first half of the year.

- You mentioned household debt is being managed stably. The February Monetary Policy Board minutes show some members mentioned that coordination with macroprudential policies should precede. Does the recently introduced stress DSR meet these conditions?

▲ The stress DSR imposes additional interest rates on variable-rate loans, which reduces loan limits. This will encourage more fixed-rate loans. The stress DSR will improve the qualitative structure of household debt.

▲ The February household loan figures were released yesterday. Bank household loans increased by 2 trillion won in February, but overall financial sector loans are decreasing. The overall trend shows a decrease in unsecured loans, an increase in mortgage loans, a decrease in non-bank loans, and an increase in bank loans. It is better to look at the whole picture rather than specific parts. Household loan flows seem to be moving somewhat stably in January and February. We expect this trend to continue for the time being, but domestic monetary policy could proceed differently than expected. If necessary, we will discuss additional measures later.

- Is the basis for judging that inflation will converge to 2% the core inflation or the consumer price inflation?

▲ The inflation stabilization target is set based on the consumer price inflation rate. This is the correct principle. Since it is important to observe the inflation trend, we do not judge convergence to the target level simply by looking at a specific number. We consider a broad range of figures in making the judgment.

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