From Inflation Defense 'Big Step' to Martial Law Response: Four Bold Years of Lee Changyong [BOK Focus]

Policy Shifts: The Bank of Korea’s First-Ever Big Step and Two Consecutive Surprise Rate Cuts
Household Debt Ratio Falls... The Era of a ‘Noisy Bank of Korea’ with a Focus on Structural Reform
External Credibility Sales During Martial Law... Minimizing Negative Economic Impact
Bank of Korea Expands Global Presence... Launching the K-Dot Plot and Project Hangang

The first-ever big step in the Bank of Korea's history (a 0.5 percentage point increase in the base rate), the reversal of the household debt ratio, and a "noisy Bank of Korea." During the tenure of Governor Lee Chang-yong, the Bank of Korea witnessed an unusual number of unprecedented events. Upon taking office, Governor Lee continuously emphasized the need for the Bank’s responsibilities to go beyond the traditional confines of monetary policy, stating that “given the medium- to long-term challenges facing our economy, the Bank of Korea’s responsibilities cannot remain limited to the boundaries of monetary policy.” As a result of these ongoing efforts to break from convention, the Bank of Korea, under his leadership, embarked on bold initiatives. What legacy did these challenges leave for the Korean economy? With Governor Lee’s departure ceremony scheduled for April 20, this article looks back on his four-year term.

"From the Bank of Korea's First-Ever Big Step to Two Consecutive Surprise Rate Cuts"

When Governor Lee took office in April 2022, the prolonged Russia-Ukraine war, the U.S. Federal Reserve’s unexpectedly rapid monetary policy normalization, and concerns over an economic slowdown in China due to the spread of the Omicron variant all weighed on the global economy. Above all, the most pressing issue was soaring inflation. As the consumer price inflation rate jumped to 6.3% (July 2022), reaching its highest level since the foreign exchange crisis, the Bank of Korea took the unprecedented step of implementing a big step—raising the base rate by 0.5 percentage points twice in July and October. This was the first time in the Bank’s history that such a move had been made. Subsequently, under Governor Lee's leadership, the Bank of Korea raised the base rate to 3.5% per annum, which helped slow the pace of inflation.

From February 2023 to September 2024, the Bank pursued a “last mile” approach by maintaining a tightening policy to anchor inflation at the target level of 2.0%. For this, Governor Lee was credited with helping the Bank of Korea become the first among major central banks to achieve the inflation target. In 2024, he also became the first Bank of Korea governor to win “Asia-Pacific Central Bank Governor of the Year” from The Banker.

In October 2024, the Bank shifted to a pivot by lowering the base rate from 3.50% to 3.25%. In November, the Bank implemented another 0.25 percentage point cut, making for an extraordinary sequence of consecutive rate cuts in its history. This was a response to the heightened risk of economic slowdown in Korea. As inflation stabilized, the Bank of Korea responded to deteriorating trade conditions due to the United States and growing downside economic risks by cutting the base rate four times, totaling 1.00 percentage point, by May of last year. In the latter half of last year, the Bank froze the base rate, citing instability in the metropolitan housing market and increased exchange rate volatility.

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Committee meeting held on the 10th at the Bank of Korea Headquarters in Jung-gu, Seoul.

"Separation of Politics and Economy" — Maintaining External Credibility During Martial Law

When short-term financial market instability emerged due to the Legoland incident in 2022, the Silicon Valley Bank crisis in the U.S. in 2023, or the U.S.-Israel-Iran conflict this year, the Bank of Korea responded with stabilization measures. Especially during the martial law situation at the end of 2024, Governor Lee emphasized that “politics and the economy in our country are separate,” providing clear guidance for market stability and actively engaging in “external credibility sales” using the Bank's global network to minimize negative impacts on the Korean economy. At the time, the Bank issued messages to calm excessive market anxiety and revamped systems to ensure sufficient liquidity could be provided if needed to guard against a credit crunch. Measures such as foreign exchange swaps with the National Pension Service were also implemented to stabilize the FX market.

Some argued that the Bank should have taken preemptive steps to cut rates as early as August 2024, ahead of the actual move in October, in response to slowing growth—a so-called “missed timing” theory. In response, Governor Lee has repeatedly explained that “at the time, with the overheated housing market, we couldn’t risk pouring fuel on the fire by cutting rates.” In other words, the Bank had no choice but to maintain rates as lowering them could have fueled a surge in real estate prices and widened financial imbalances. When the won-dollar exchange rate nearly hit 1,500 won at the end of last year, there were also criticisms that the Bank's decision not to raise rates led to the depreciation of the won. At the press conference following his final Monetary Policy Committee meeting on April 10, Governor Lee said, “(There are many evaluations, but) with regard to rate decisions, the Monetary Policy Committee members did well, so I have no major regrets.”

Lee Chang-yong, Governor of the Bank of Korea, is answering reporters' questions at a press conference following the monetary policy meeting held at the Bank of Korea in Jung-gu, Seoul on the morning of January 15.

Household Debt Ratio Turned Downward... The Era of a 'Noisy Bank of Korea' with a Focus on Structural Reform

The soft landing of household debt was an area Governor Lee consistently emphasized after taking office. He warned that rising interest burdens could dampen domestic demand and undermine both economic growth and financial stability, and that unchecked debt growth could lead to a bubble burst with significant social costs.

During his tenure, the household debt-to-GDP ratio reversed its upward trend. The ratio jumped from 89.6% at the end of 2019 to 97.1% at the end of 2020, when the COVID-19 pandemic took hold, and soared to 98.7% at the end of 2021. However, after Governor Lee took office and implemented tighter monetary policy to strengthen household debt management, the ratio fell to 97.3% at the end of 2022, 93.0% at the end of 2023, 89.6% at the end of 2024, and finally 88.6% at the end of last year. Governor Lee also made efforts to publicize the issue and seek solutions, such as hosting policy conferences focused on household debt.At a conference on improving real estate credit concentration in April of last year, he remarked, “The fact that the household debt-to-GDP ratio, which had not fallen in 15 years, has finally turned downward is a major change,” but stressed that this should not be the end, and that the gradual reduction of the ratio must remain a medium- to long-term goal.At a National Assembly audit in October of last year, he also said, “There needs to be a clear message that household debt will not be allowed to increase,” and called for a macroprudential policy framework to govern decisions such as lending restrictions.

Another priority that Governor Lee consistently emphasized was structural reform of the Korean economy. He argued that bold measures were needed to change the trajectory of potential growth, which is at risk of falling to 0% by the late 2040s, and that structural reform was essential. Accordingly, during Governor Lee’s term, the Bank of Korea continuously released a “structural reform research series” covering topics such as low birth rates and population aging, balanced regional development, the admissions system, housing finance, climate change, care services, autonomous taxis, life-sustaining treatment, and continued employment for the elderly. By focusing on policy alternatives for issues directly related to medium- to long-term growth potential, the Bank, under his leadership, frequently found itself at the center of attention as a “noisy Bank of Korea.” In response to criticism that the Bank should “focus on its core mandate of monetary policy,” Governor Lee repeatedly emphasized that “if we fall into a low growth trap, the effectiveness of monetary policy will inevitably be limited,” and that “we must find solutions for the challenges we face, which requires both fiscal policy and structural reform.”

(From left) Andrew Bailey, Governor of the Bank of England; Lee Changyong, Governor of the Bank of Korea; Jerome Powell, Chair of the U.S. Federal Reserve; Christine Lagarde, President of the European Central Bank; and Ueda Kazuo, Governor of the Bank of Japan, are participating as panelists sharing their views at the policy discussion session of the ECB Central Banking Forum held last year in Sintra, Portugal. ECB YouTube

Bank of Korea Grows its Presence on the Global Stage... K-Dot Plot and Project Hangang

Governor Lee also contributed to strengthening the Bank of Korea’s international presence. He served as a director of the Bank for International Settlements (BIS) and as chair of the Committee on the Global Financial System (CGFS), strategically reflecting Korea’s policy interests on the global agenda. He also played a key role as an initial architect in the restructuring of the regional financial safety net (CMIM) and in discussions on cross-border payment settlements. Particularly symbolic was his appointment as chair of the CGFS, a position previously held exclusively by the G7 countries.

Governor Lee was the first Bank of Korea governor to participate in the Federal Reserve’s Jackson Hole Economic Policy Symposium, the European Central Bank (ECB) Sintra Forum, and the International Monetary Fund (IMF) Michel Camdessus Central Banking Lecture, raising the Bank’s stature. Previously, the only central bank governors to have attended all three events were Mario Draghi, former ECB president; Mark Carney, former Bank of England governor; Christine Lagarde, ECB president; and Haruhiko Kuroda, former Bank of Japan governor—placing Governor Lee in esteemed company. During his tenure, prominent figures such as Janet Yellen, former Fed chair; Agustin Carstens, former BIS general manager; and Christopher Waller, Fed governor, visited the Bank of Korea for policy discussions, further strengthening its presence within influential economic networks.

Expanding external communication was another area of emphasis during Governor Lee’s term. In the field of monetary policy, he introduced a three-month conditional rate outlook for Monetary Policy Committee members in October of his first year, and in February of the following year, launched the Korea-style dot plot (K-dot plot) with a six-month horizon to strengthen communication with the market. From August 2024, the Bank prioritized providing more detailed information on the current economic situation by releasing economic outlooks on a quarterly basis.

Governor Lee’s determination was also reflected in the Bank’s proactive efforts to respond to digital finance structural changes. To this end, the Bank promoted live transactions under “Project Hangang,” participated in “Project Agora,” and supported the government’s improvement of treasury fund management, laying the groundwork for the commercialization of digital currency systems and deposit tokens. Regarding the possible issuance of a won-denominated stablecoin, he emphasized a “bank-centric gradual introduction” and published a white paper outlining seven key risks. The Bank became the first central bank to build a finance- and economy-specialized sovereign artificial intelligence (AI) platform called “BOKI” on its internal network, and alongside AI adoption, pursued network integration projects as well.

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