[Q&A] Lee Ju-yeol "If Economic Downturn Deepens, Use Non-Interest Rate Measures Such as Open Market Operations and Government Bond Purchases"

"Government's Strong '7·10 Real Estate Measures'... Limited Possibility of Further Housing Price Increases"

[Asia Economy Reporter Jang Sehee] On the 16th, Lee Ju-yeol, Governor of the Bank of Korea, stated, "Since the current base interest rate is believed to be close to the effective lower bound (the lowest level the rate can realistically be lowered to), we will respond by utilizing policy tools other than interest rates, such as open market operations and government bond purchases, in case of a deepening economic downturn."

Governor Lee made these remarks during an online live press conference held immediately after the Monetary Policy Committee meeting that day. He added, "We may consider normalizing interest rates when the outlook for our economy improves."

The following is a Q&A with Governor Lee.

- There are talks that regular government bond purchases are necessary due to increased bond issuance following the Korean New Deal. What is your view on the need for quantitative easing?

▲ Since the specific funding sources for the New Deal have not been determined yet, it is difficult to comment on the impact at this time. The market is aware that government bond issuance continues and bonds for the Industrial Stability Fund have also been issued, which may cause supply-demand imbalances in the bond market and concerns about a rise in long-term interest rates. We are closely monitoring potential market instability, and if necessary, we will actively consider market stabilization measures, including expanding simple government bond purchases.

- The real estate market is said to be overheating. What are the ways to resolve the gap between the real economy and finance?

▲ The decision to keep interest rates steady was not made solely reflecting the housing market. Considering current growth and inflation trends and future growth prospects, we believe it is appropriate to maintain the current monetary stance. The real estate market should be addressed through various means such as government macroprudential policies and supply-demand measures. It is important to prevent liquidity from flowing excessively into asset markets and instead channel it into productive investments. I emphasize that the government shares this recognition and is making efforts accordingly.

- Last month, you said the growth rate would not deviate from the initial forecast path. Why was the growth rate revised downward after just three weeks?

▲ Although it was only three weeks ago, there have been significant changes. First, exports declined much more than we had expected, which led to a downward revision of the second-quarter growth rate. The COVID-19 spread scenario has also not calmed down to the extent that we can dismiss concerns about the 'worst-case scenario.' In the U.S., economic activities are reopening and closing intermittently, which directly affects the global economy. The improvement in exports after the third quarter is also delayed, which inevitably impacts growth. However, we still hope that the worst-case scenario will not materialize.

- What is the effect of the third supplementary budget on boosting growth?

▲ Technically speaking, I estimate it to be around 0.1 to 0.2 percentage points.

- What is your assessment of the recent rise in housing prices and the government's real estate measures?

▲ The government's two rounds of measures last month and this month demonstrate a strong commitment to stabilizing the housing market. In particular, they are expected to be effective in curbing speculative demand from multi-homeowners. Given the government's strong measures, the possibility of further housing price increases is expected to be quite limited.

- If the low interest rate stance continues, there is an increasing risk that inflation will not reach the target. Which goal will you prioritize in your policy?

▲ While we have multiple goals, including price stability and interest rate stability, the uncertainty in the domestic economic outlook is currently very high. Monetary policy needs to maintain an accommodative stance until the domestic economy shows signs of recovery from COVID-19. Although the real economy is struggling, housing prices are rising unexpectedly, and household debt continues to increase, so we will carefully monitor changes in financial stability.

- There are concerns that regular government bond purchases by the Bank of Korea will be necessary due to fiscal demands and increased bond issuance from the Korean New Deal.

▲ The funding plan for the Korean New Deal has not yet been concretely determined, so it is difficult to comment on its impact on the bond market at this point. The market is concerned about supply-demand imbalances and potential long-term interest rate increases due to ongoing government bond issuance and Industrial Stability Fund bonds. As I have said several times, the Bank of Korea is closely monitoring these risks and will actively consider market stabilization measures, including expanding bond purchases, if instability arises.

- Recently, government officials such as Deputy Prime Minister Hong Nam-ki have frequently commented specifically on the Bank of Korea's monetary policy decisions.

▲ I reviewed Deputy Prime Minister Hong's remarks in context. At that time, the Governor clearly stated that interest rate decisions are the Bank of Korea's exclusive authority and that it is inappropriate for the Deputy Prime Minister to comment on them. His comments were made in the context of efforts to guide abundant market liquidity into productive sectors related to the real estate market. Accusations of interference in interest rate policy are unfounded.

- Monetary Policy Committee member Cho Yoon-je sold all his stocks and exercised voting rights at the committee. Although the issue has been settled, there are many criticisms that the committee's authority has been undermined.

▲ Member Cho's stock holdings and sales were handled legally in accordance with relevant laws, regulations, and procedures. I do not believe this is related to the authority or credibility of the Monetary Policy Committee.