'Inflation Fighter' Lee Chang-yong... Faces Thorny Path of Interest Rate Hikes

Lee Chang-yong, nominee for Governor of the Bank of Korea, is attending the confirmation hearing held at the National Assembly on the 19th and taking the oath as a witness. Photo by Yoon Dong-joo doso7@

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[Asia Economy Reporter Seo So-jung] Lee Chang-yong, the newly appointed Governor of the Bank of Korea, received his appointment letter at the Blue House on the morning of the 21st, officially beginning his four-year term.

As the first external appointment in eight years, signaling significant changes inside and outside the Bank of Korea, the financial market is closely watching every move of Governor Lee. He assumed the role of head of monetary policy amid the prolonged Russia-Ukraine war and the global struggle with severe inflation, a time when the world is desperately seeking solutions.

With domestic and international uncertainties higher than ever, attention is focused on whether Governor Lee can devise effective monetary policies amid South Korea’s economic situation at the crossroads of high inflation and low growth. During his confirmation hearing, he presented himself as an ‘inflation fighter,’ leading to speculation that he might follow the path of South Korea’s own ‘Paul Volcker.’

◆End of the Governor Vacancy after 21 Days= After receiving his appointment letter on the day, Governor Lee held an inauguration ceremony at the convention hall on the first floor of the Booyoung Taepyeong Building in Jung-gu, Seoul, which was used as the task force (TF) office for the National Assembly’s confirmation hearing, officially starting his duties at 3 p.m. The National Assembly’s Planning and Finance Committee unanimously adopted his confirmation report the day before, and President Moon Jae-in presented the appointment letter at 11 a.m. that day. Consequently, the unprecedented vacancy of the Bank of Korea governor position came to an end after about 21 days.

Although Governor Lee officially took office through the presidential appointment process, the pressing issues pouring in alongside congratulatory messages weigh heavily on the shoulders of the head of monetary policy.

The top priority remains inflation. Due to the surge in international oil prices caused by the Ukraine crisis, the consumer price index in March rose by 4.1% compared to the same month last year. This increase above 4% is the first in 10 years and 3 months since December 2011 (4.2%). The problem is that this upward trend is expected to continue. Governor Lee expressed concern during the confirmation hearing, stating, "I expect the rising phase to last at least one to two years."

This is why there is speculation that he might become South Korea’s ‘Paul Volcker.’ Paul Volcker, the former chairman of the U.S. Federal Reserve, well known as an ‘inflation fighter,’ raised interest rates to 21.5% in 1981 to combat rampant inflation. Although this rapid increase faced strong public backlash, the policy successfully brought inflation down from a record high of 14.8% in 1980 to 2.36% in 1983.

Governor Lee’s statement, "Even if it’s unpopular, I will focus on signaling through raising the base interest rate to prevent inflation from rising further," reflects his determination as an inflation fighter. He emphasized, "Much of the current inflation is due to supply-side factors such as oil prices, supply chains, and grain prices. Therefore, questions may arise as to why inflation is not controlled despite raising interest rates, but if we do not respond with interest rates, inflation could rise even faster."

He indicated that monetary policy will be conducted from a balanced perspective going forward. While the April Monetary Policy Committee focused on inflation and raised the interest rate by 0.25 percentage points, he expressed the intention to balance growth and inflation in the upcoming May and July Monetary Policy Committee meetings.

[Image source=Yonhap News]

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◆Challenges of Inflation and Household Debt Pile Up= Household debt, which amounts to about 1,900 trillion won, is another difficult issue he must address. During the confirmation hearing, Governor Lee said, "Household debt is related to real estate, so signaling through interest rates is important, but it is impossible to solve the problem with the Bank of Korea’s interest rate policy alone." He proposed, "Therefore, a government-wide task force should be formed to develop comprehensive solutions considering structural, fiscal, and vulnerable group issues." He also warned, "If we fail to curb it now and household debt continues to increase, greater damage will be inevitable later." He added, "Basically, if interest rates rise, it will be painful, but I believe the growth rate of household debt will slow down with a time lag."

However, Governor Lee also mentioned communication and coordination regarding potential conflicts with government policies during the normalization of monetary policy, expressing his intention not to take a ‘one-way’ approach.

Regarding concerns that the government’s supplementary budget (추경) might stimulate inflation, he responded, "The current supplementary budget is a micro-level policy supporting small business owners and self-employed individuals, so it is an unavoidable selective compensation." However, he added, "If the total amount becomes very large and affects inflation on a macro level, naturally, the Bank of Korea should also be involved in discussing with policy authorities how to manage the inflation impact."

Internal organizational changes are also among the challenges Governor Lee must tackle. After the Bank of Korea established its mid- to long-term development strategy (BOK 2030) in 2020 and consulted a consulting firm, the organizational health score was found to be 38 out of 100, a failing grade. Governor Lee stated, "Within the next one to two months, I will prepare a plan that can gain consensus and improve the Bank of Korea to become the best think tank in the country."

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