[Q&A] Bank of Korea Governor: "Difficult to Cut Interest Rates in First Half... May Outlook is Important"

On the 22nd, Lee Chang-yong, Governor of the Bank of Korea, stated, "I maintain my personal view that it is difficult to lower the base interest rate in the first half of the year," but also expressed his intention to consider the timing of a rate cut by saying, "I will review the numbers again when we update the economic outlook in May and make a judgment."

At a press conference held immediately after the Monetary Policy Committee's decision to keep the base rate unchanged at 3.5% per annum, Governor Lee said, "At the monetary policy direction meeting in January, I mentioned that it would be difficult to lower the interest rate in the first half of the year," and stated that his view has not changed this time either.

However, he mentioned that although the Monetary Policy Committee members unanimously agreed to keep the rate unchanged in this decision process, one out of six members suggested keeping open the possibility of a rate cut within the next three months. While it is not yet at the level of a minority opinion, this indirectly indicates that there is a mood of considering the timing of a rate cut.

Regarding the inflation rate, he noted that it is declining faster than expected. Governor Lee said, "We are forecasting 2.9% for the first half of this year and 2.3% for the second half," adding, "The downward trend in inflation is progressing faster than our previous forecast."

[Image source=Yonhap News]

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Below is a Q&A session with Governor Lee at the press conference.

- The Monetary Policy Committee proceeded with seven members. What are the members' views on the interest rate outlook within the next three months?

▲ Except for myself, five members expressed the view that maintaining the rate at 3.5% after three months is appropriate. One member suggested that the possibility of lowering the rate below 3.5% should be kept open. The five members believe that inflation remains above the target level of 2%, and it is uncertain whether inflation will slow as forecasted, so it is premature to rush into a rate cut. The remaining member expects that consumption is weaker than initially forecasted, which will reduce inflationary pressure, and that early rate cuts cannot be ruled out due to the need to prepare for domestic demand weakness.

- Last month, you mentioned that a rate cut within six months would be difficult. Has your view changed?

▲ If the February economic outlook is not significantly different from the November outlook, I said it would be difficult to lower rates in the first half of the year. The February forecast differs only slightly from November’s, so the outlook remains that a rate cut in the first half is unlikely. I will review the numbers again when we update the economic outlook in May.

- Central banks in the US and Europe are discussing rate hikes. Is the Bank of Korea closer to raising or lowering rates?

▲ It is still premature to discuss rate cuts. Inflation remains significantly above the target level, and we need to observe whether inflation will decline as forecasted. Globally, we are watching how inflation behaves in the final stages. It is important to see if inflation decreases as we expect.

- In the US, the slowdown in the pace of inflation decline in January has delayed the timing of rate cuts. Considering the growth and inflation decline trends in Korea and the US, how do you evaluate these expectations?

▲ In the US, the market has moved ahead of Federal Reserve officials. Compared to that, I think Korea’s market expectations and forecasts are much more aligned. However, in Korea, inflation may not decline gradually and steadily but could be affected by international factors, so we need confidence in the inflation trend before monetary policy can be clear. The May outlook will be important for this.

- The monetary policy direction statement mentioned significant uncertainty regarding the outlook for real estate project financing (PF) restructuring. Do you see downside risks outweighing upside risks for economic growth? If rates are cut, would the real estate PF situation be considered? How significant is the PF impact on the market?

▲ There are both upside and downside factors in the economic outlook. Exports, centered on the IT sector, are performing better than expected, while consumption is worse than expected. Regarding whether rate decisions will be based on the real estate PF situation, the answer is no. The Taeyoung case is progressing well, and the government is managing it properly. It is being orderly resolved and is considered manageable. This should be addressed through temporary policies, not by adjusting interest rates.

- The monetary policy statement mentioned that the core inflation rate was revised downward by 0.1 percentage points and that inflation remains high, indicating a continued slowdown trend. However, a partial paragraph mentioned geopolitical risks and expressed uncertainty about stabilizing at the target level. Can we say that expectations for inflation converging to the target have strengthened compared to before?

▲ Core inflation fell at the end of last year, then rose again. Considering base effects, this confirms a downward trend. Inflation will fluctuate but is expected to decline fundamentally.

- Excluding the IT sector, you mentioned last year that the economic growth rate would be around 1.7% this year. You said domestic demand is worse than expected in this forecast. Even if overall growth exceeds potential growth, do you see a need to respond with monetary policy if domestic demand weakens? Are you estimating growth rates for domestic demand excluding exports?

▲ You seem to be asking whether monetary policy should consider domestic demand excluding exports. The overall growth rate determines our economy, not just domestic demand. Domestic demand is significant for the general public, but we must look at overall inflation and GDP growth.

- Regarding public utility price hikes, there are concerns that inflation may rise again after the general election in April. There are also rumors of an election crisis. How was the election reflected in this inflation forecast?

▲ I would need to know the basis for such claims to comment. Many real estate PF cases are already being resolved. Since they are being resolved, evidence is needed to suggest changes around the election. The forecast assumes gradual increases in public utility prices. When making forecasts, we consult with the Ministry of Economy and Finance on how to adjust public utility prices, so this is reflected in the inflation outlook.

- You mentioned expanding forward guidance at the recent economic conference. What are the Monetary Policy Committee members’ views on this discussion?

▲ It is under discussion. Internal testing is needed, so I do not think it will be implemented within this year.

- Do you feel any burden about the possibility of the longest-ever rate freeze?

▲ Keeping rates unchanged is as difficult as raising or lowering them. Rather than how long rates are held steady, we should judge based on whether inflation follows the expected path, including its speed and trend.

- You have warned about stimulating real estate price expectations. The Consumer Sentiment Survey’s housing price outlook was 110 in September last year, 92 in January, and remained 92 this month. Do you view housing prices positively?

▲ I do not want to predict housing prices. It varies by region. Housing prices and transactions relate to household debt. In the long term, one issue in Korea’s economy is that all funds flow into real estate. Corporate loans also heavily flow into real estate. It is undesirable for capital to concentrate in real estate, which creates little added value. However, interest rate policy cannot adjust this. It is an important role of the Bank of Korea not to artificially raise real estate prices through incorrect rate policies. We must implement macro-stability policies with the government to avoid stimulating real estate prices, which is a lesson learned over the past few years. I believe we will avoid raising real estate prices through wrong interest rate policies as much as possible.

- You expect inflation to fall to the low 2% range by the end of this year. Previously, the timing was expected around the end of this year or the first half of next year. Has this forecast been brought forward?

▲ Yes. The downward trend in inflation is progressing faster than previously expected. It is true that inflation is stabilizing. Korea is handling inflation better than other advanced countries like the US, so the pace of inflation decline is not worse than in other countries.

- Recently, there is a view that domestic loan rates fluctuate according to US policy rates. What is your opinion on this?

▲ Rather than losing independence, it means Korea’s financial market has matured. Basically, it is normalizing. Looking at interest rate movements, when adjusting policy rates, about 50% of long-term rates beyond five years follow the policy rate, and 50% follow international market movements. We need to see if this continues. It is certain that monetary policy considerations have become more complex.

- China recently raised its base interest rate. What impact do you expect from the Chinese market, including real estate, on Korea?

▲ In recent months, China’s stimulus policies have become more concrete and bold. They have explicitly listed a whitelist of real estate projects that can be revived, indicating policy changes. We expect China to use stimulus measures to achieve economic growth above the mid-4% range this year.

- Ahead of the general election, there is a campaign promise to allow investment in Bitcoin spot ETFs. What is your opinion on this?

▲ I prefer not to comment. This is an issue for the Financial Services Commission to review rather than the Bank of Korea.

- Among the factors affecting the economic growth forecast, which variable currently has the greatest volatility?

▲ As I mentioned, there are both upside and downside factors, so it is difficult to single out one.

- The market’s expected timing for the Federal Reserve’s rate cut has been pushed back to around June. Last year, a Bank of Korea Monetary Policy Committee member suggested keeping open the possibility of a rate cut in the second half. Do you think Korea could cut rates earlier than the Fed?

▲ I do not think US and Korean rate policies move mechanically together. Last year, the US rate cut pace was very fast. Historically, countries are more likely to pursue differentiated monetary policies. Korea will not necessarily cut rates just because the US does. However, overall, if the US rate cut changes the atmosphere, there will be more room for differentiated policies depending on inflation.

- You emphasized the importance of structural improvement and are actively promoting related research within the Bank of Korea. There were reports that the potential growth rate re-estimate will be announced in the first half of this year, with some concerns it might fall to the 1% range. What is your view?

▲ After completing the base year revision, we will estimate growth rates based on the data. We expect to report the results around the second half of the year. Currently, we see it in the 2% range, but if aging is not properly addressed, negative growth is possible. Future potential growth will depend on the policies pursued. Rather than accepting that aging will lower potential growth below 2%, we should focus on which direction it will take. Assuming a repeat of Japan’s 20 years is a passive attitude. We need to consider ways to raise it through structural efforts.

- Commercial real estate risks are expanding mainly in the US. How do you view the risk factors that the real estate market may pose?

▲ I understand the Financial Supervisory Service will release data on commercial real estate this afternoon. From the F4 meeting review, exposure exists but is low relative to total asset management.

- One Monetary Policy Committee member mentioned the possibility of an early rate cut within three months. Was this a strong opinion?

▲ The member believed rates should be kept unchanged today. It was an intention to keep the possibility open after reviewing data, not a firm decision to cut. It means leaving room to raise rates if March inflation data requires it.

- If the outlook proceeds as expected, do you think a minority opinion for a rate cut could emerge in May?

▲ Compared to the last monetary policy direction meeting, the main differences are that exports are better than expected and domestic demand is weaker. Inflation is falling as expected. This meeting’s direction did not deviate significantly from expectations.

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