[Seo Joonsik's Market and Economy] Korean Economy on the Operating Table... Shin Hyunsong's Team Must Overhaul Distorted Price Indices and Communication Structure

Published 29 Apr.2026 11:00(KST)

Distorted Price Indicators: Structural Flaws Must Be Corrected
Abnormally Low Housing Weighting in CPI
Low Rates for "Price Stability" Have Fueled the Real Estate Bubble
The Board Must Become an Institution That Communicates with the Public
Limited Communication Has Led to Policy Misunderstanding and Distrust
Board Members Must Be "Public Commentators" Explaining the Economy's Direction

On April 21, Shin Hyunsong, renowned globally as a leading macroeconomist, officially took office as the 28th Governor of the Bank of Korea. He also serves as the chair of the Monetary Policy Board (hereafter referred to as the Board), the highest decision-making body responsible for determining Korea's interest rates and monetary policy. The appointment of a figure who championed the importance of financial stability and macroprudential policy during the global financial crisis—thereby shifting the international economic policy paradigm—now heading Korea’s central bank, has brought considerable reassurance and high expectations to the market.

Hyun-Song Shin, Governor of the Bank of Korea

However, the macroeconomic conditions facing the new governor are far from easy. I have often likened a central bank’s monetary policy to the opening and closing of a massive dam’s floodgates. When interest rates are lowered, the liquidity that is released should ideally seep into the parched “real economy”—that is, production and domestic consumption. Yet, since the 2010s, Korea’s monetary policy has fundamentally failed in this basic mechanism. While the floodgates were open, the flow of funds was distorted, and liquidity was channeled intensively into the real estate market rather than production and consumption. In my column published on September 30, 2024, titled “Rate Cuts Likely to Become a Disaster,” I strongly argued the case for the futility of expansionary liquidity policies. Nevertheless, starting from the very next month, the policy rate was lowered from 3.5% to 2.5% over just eight months, and the concerns raised at that time have now materialized in today’s outcomes.

The “distorted real estate market,” shaped by years of cumulative Board decisions, and “household debt” that has reached its limit, have become chronic problems that are now nearly impossible to cure with any ordinary prescription. The surge in household debt and rising housing costs have weakened effective demand—in other words, the domestic economic base—leading citizens to bear harsh consequences.

Major surgery is necessary. However, this operation must proceed without general anesthesia, making it all the more difficult. Against this backdrop, I would like to propose two reforms to the new governor.

First, the structural flaws in price indices must be corrected. Why has the Board’s interest rate decision system remained fixated on “price stability” for decades, even as real estate prices soared? The fundamental reason lies in the “distortion of statistical indicators,” specifically the excessively low weighting of housing costs in the Consumer Price Index (CPI). In major advanced economies like the United States, the share of housing costs—including Owner’s Equivalent Rent (OER)—exceeds 30% in the price index. When housing prices and rents rise, this is immediately reflected in the price indicators, prompting central banks to proactively tighten policy to contain inflation. This structure naturally links the real estate market—the main culprit behind perceived inflation—with monetary policy.

In contrast, Korea’s price index has long maintained a distorted “basket” structure that severely underrepresents fluctuations in jeonse (lump-sum lease) and owner-occupied housing costs. Even as perceived housing costs have multiplied and ordinary citizens’ disposable incomes have been sucked into a black hole of housing expenses, the “official inflation rate” displayed on the Bank of Korea’s conference tables remained a stable 1–2%. The distortion in the indicators led to distortion in policy, and the prolonged low interest rate stance—ostensibly for price stability—allowed the real estate bubble to swell unchecked.

What is even more disappointing is that, despite these issues persisting for so long, there has been virtually no serious introspection or criticism from within the institution itself. Numerous members have served on the Board, but it is difficult to find any trace in past minutes of the Board of anyone acknowledging the limits of the indicators, advocating for a revision of the price index, or at least fiercely debating the need to factor rising real estate asset prices into monetary policy as real inflationary pressure.

Deputy Prime Minister and Minister of Economy and Finance Koo Yoon-chul and Bank of Korea Governor Shin Hyun-song are holding a first dinner meeting at the Banking Hall in Jung-gu, Seoul, on April 23, 2026. Photo by Dongjoo Yoon

Secondly, the Board must become an institution that communicates with the public. Currently, the Board’s structure does not sufficiently reveal the policy decision process or the judgments of individual members to the outside world. As a result, from the public’s perspective, the Board feels less like a “core institution steering the national economy” and more like a “mysterious body that occasionally announces interest rates.” Of course, caution is essential in monetary policy, but excessive secrecy can lead to misunderstanding and mistrust. Policy earns trust not only through outcomes but also when the process and the rationale behind decisions are clearly explained. The suspicion, voiced by some, that “the Board only reflects the views of vested interests” largely stems from this lack of communication.

This stands in stark contrast to the U.S. Federal Reserve. Interestingly, Fed members frequently give speeches and interviews, openly explaining their economic perspectives and the rationale for their policy decisions. While this may cause short-term market volatility, in the long run it enhances the predictability and credibility of policy. It is now time for the Board to evolve. Board members should not be mere technocrats who set interest rates, but rather “public commentators” who explain the direction of the national economy. They must be experts in numbers, but also able to articulate what those numbers mean for people’s lives.

The change required of Governor Shin Hyunsong goes far beyond mere policy adjustment. The Bank of Korea must break free from its past path dependency. The independence of a central bank is not just about keeping a distance from the government—it also means independence from outdated indicators, rigid thinking, and the inertia that prevents honest self-reflection.

The public is no longer a passive recipient of policy results, but an active participant who understands and evaluates the policy context. The Bank of Korea must now break with the past, when it hid behind distorted price indicators in the name of “price stability,” and instead reflect real inflation—including housing costs—head-on by establishing a monetary policy framework that considers both asset markets and the real economy. At the same time, the Board should move beyond a structure in which critical policy decisions are made quietly and explained only after the fact, toward a model where the rigorous process of deliberation and judgment is shared with the public. After all, as important as opening the floodgates is, it is equally crucial to carefully predict where the water will flow—and to explain this responsibility clearly.