[Inside Chodong] Aftershocks Remain from Governor Lee Chang-yong's 'Interest Rate Adjustment' Incident

by Seo Sojeong

Published 14 Apr.2023 08:30(KST)

Updated 14 Apr.2023 12:38(KST)

Seo So-jeong, Economic and Financial Department

"There has never been any statement advising against making overly micro-level adjustments to interest rates."

Bank of Korea Governor Lee Chang-yong issued an unusual immediate clarification after some reports claimed that he made such remarks at a recent regular meeting of four macro-financial policy leaders attended by Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho, Financial Services Commission Chairman Kim Ju-hyun, and Financial Supervisory Service Governor Lee Bok-hyun. As interpretations circulated that Governor Lee was voicing criticism from the central bank’s perspective, concerned that the monetary policy effect would weaken due to financial authorities pressuring banks to lower loan interest rates, he firmly denied, saying, "There was absolutely no such remark made with that intent." Coincidentally, Financial Supervisory Service Governor Lee Bok-hyun also addressed reporters, explaining that the interpretation that financial authorities’ policies were taken from a completely different stance than the Bank of Korea was a misunderstanding, which further fueled the controversy. Ultimately, on the 13th (local time), while attending the G20 Finance Ministers and Central Bank Governors Meeting in Washington DC, Governor Lee emphasized the necessity of government intervention in market interest rates, effectively dismissing the so-called 'micro-level adjustment remarks.'

Since his inauguration, Governor Lee has pressed the tightening pedal by raising the base interest rate by 2 percentage points annually. However, with the base rate frozen twice consecutively this year, market expectations for a rate cut have grown. Seemingly aware of this, immediately after the Bank of Korea’s Monetary Policy Committee decided to hold the base rate steady on the 11th, Governor Lee issued a warning, stating, "Market perceptions of a rate cut are too excessive." He also made hawkish comments, saying, "The five Monetary Policy Committee members have left open the possibility of a final rate of 3.75%." Nevertheless, the market views the rate hike cycle as effectively over. Although the base rate remains at 3.5%, the highest level in 14 years, financial authorities’ calls for 'win-win finance' and pressure on loan interest rates have pushed the minimum fixed-rate mortgage interest rate down to the 3% range (lower bound) within a year. The divergence between the Bank of Korea and financial authorities’ actions has kept the discord alive.

While the Governor’s remarks incident ended as a mere misunderstanding, aftershocks continue. In particular, there are considerable concerns about the Governor’s approach of actively communicating and cooperating with the government. Although confrontation with the government is not desirable, since his inauguration, Governor Lee’s excessive emphasis on 'policy mix' has led to criticism that he has become overly absorbed in harmony with the government. Even within the Bank of Korea, there are opinions that, even if the statement "do not try to adjust interest rates micro-level" was never actually made, it is a remark that a central bank governor with independence could reasonably make. While it may not completely neutralize monetary policy, temporary factors that constrain the effectiveness of monetary policy do arise, and discussing how to respond and, when appropriate, voicing 'the right message' is the raison d'?tre and responsibility of a central bank.

In the second half of this year, government demands for rate cuts due to economic concerns may intensify. With next year’s general election approaching, pressure for rate cuts will become even stronger. As the policy pivot competition among major countries, including the U.S. Federal Reserve (Fed), has already begun, many are already worried about how long the Bank of Korea can maintain the base rate freeze. Although inflationary pressures have eased, the Bank of Korea forecasts that the annual core inflation rate (excluding food and energy), which reflects the underlying trend of inflation, will rise somewhat above 3%. Variables such as a rebound in international oil prices and public utility fee hikes could further fuel inflation. Amid mounting uncertainties surrounding monetary policy, Governor Lee will mark his first anniversary in office on the 21st. It is hoped that Lee Chang-yong’s style of policy mix, characterized by active communication with the government, will not be distorted in response to government demands in the second half of the year.