[Q&A] Lee Ju-yeol "Growth Rate in Mid-3% Possible Even Considering Low Vaccination Rate"

Bank of Korea Monetary Policy Committee Holds Base Interest Rate at 0.50%

On the morning of the 15th, Lee Ju-yeol, Governor of the Bank of Korea, presided over the Financial Monetary Policy Committee plenary meeting held at the Bank of Korea in Jung-gu, Seoul, and struck the gavel.

[Asia Economy Reporter Eunbyeol Kim] Lee Ju-yeol, Governor of the Bank of Korea, stated on the 15th, "I believe that an annual economic growth rate in the mid-3% range is achievable this year."

Governor Lee emphasized at an online press conference held immediately after the regular Monetary Policy Committee meeting at the Bank of Korea headquarters in Jung-gu, Seoul, "Considering the movements over the past few months after the first quarter of this year, a mid-3% growth rate is definitely attainable." He added, "This is mainly due to the improvement in external conditions, such as the large-scale economic stimulus package in the United States and the resulting acceleration of global economic growth. The IT sector is also strengthening, leading to an expansion in our exports and facility investment growth beyond initial forecasts."

Governor Lee also said, "Domestically, social distancing measures have been eased, reviving consumer sentiment, and the supplementary budget being implemented since the end of last month is expected to contribute to boosting domestic demand to some extent."

However, he added, "It is indeed somewhat concerning that the resurgence of COVID-19 has not been easily contained and that the vaccination rate remains in the 2% range." He explained, "Although the current spread is not calming down easily, it is expected not to worsen significantly compared to now, and considering the government's multifaceted efforts, the vaccination rate, though low, is being addressed."

Below is a Q&A session with Governor Lee.

- After today's rate freeze, you mentioned in the monetary policy direction statement that growth is expected to exceed 3% this year. Do you still expect growth to surpass 3% despite the low vaccination rate and the spread of COVID-19?

▲ To conclude, I believe that a 'mid-3%' growth rate is possible this year. Considering the global economic trends and the domestic economic growth flow in the first quarter, a mid-3% growth rate is definitely achievable. This is mainly due to the improvement in external conditions. Domestically, consumer sentiment has started to revive, and the supplementary budget being executed since the end of last month is expected to contribute to boosting domestic demand to some extent. It is true that the vaccination rate remaining in the 2% range is concerning. The possibility of a mid-3% growth rate assumes that the COVID-19 situation will not worsen beyond the current state and that vaccine distribution will proceed without disruption in the second half of the year. It also assumes that the currently recovering consumption will continue its improvement trend.

- Recently, department store sales have been recovering, showing signs of a rebound in private consumption. What is your opinion on the suggestion that preemptive rate hikes are necessary to resolve financial imbalances?

▲Domestic economic recovery is strengthening, and inflation is rising, so opinions may emerge that interest rates should be raised preemptively to alleviate financial imbalances such as household debt increases and housing price rises. However, there remains significant uncertainty affecting our economy, including the progression of COVID-19 and vaccination rates. Therefore, it is difficult to be confident that the recent recovery is firmly established. At this stage, it is premature to consider a policy shift. Maintaining an accommodative monetary policy does not mean ignoring financial stability; we always pay close attention and remain concerned.

- When deciding on rate hikes, do you prioritize growth over inflation? Also, how do you view the fact that domestic liquidity is hitting new highs every month?

▲ Monetary policy currently places more importance on future inflation outlook and trends rather than current inflation rates. Future economic conditions and financial stability are also considered. The increase in liquidity is an inevitable result of the government and central bank actively responding to the COVID-19 crisis. The rise in loans has contributed to overcoming the economic crisis.

- During the foreign exchange crisis, potential growth was maintained, but it declined during the global financial crisis. What impact do you expect this time?

▲ If swift structural reforms are implemented to improve economic efficiency as during the foreign exchange crisis, the decline in potential growth can be significantly mitigated. However, the COVID-19 crisis is not yet over and is still ongoing, so uncertainty about potential growth is very high. Considering the deterioration in employment and reduced service sector production capacity, potential growth is expected to be much lower than before the COVID-19 crisis. Once the pandemic is resolved, we plan to re-estimate and review it. The GDP gap is currently narrowing faster than expected due to accelerating growth.

- Can the Bank of Korea provide forward guidance like the U.S. Federal Reserve (Fed)?

▲ It is not easy for Korea to adopt forward guidance. Although the U.S. presents it through specific figures, it previously used qualitative expressions to indicate policy directions. Forward guidance aims to communicate the central bank's policy decision background and future operational plans to economic agents and markets in any form. Rather than indicating policy direction with one or two indicators, we will make policy decisions comprehensively considering growth, inflation, and other factors, and maintain close communication with economic agents.

- Are you not concerned about the possibility that continued expansionary policies could increase national debt and lead to credit rating downgrades?

▲ It is true that if national debt increases rapidly over a long period, it can negatively affect the country's credit rating. However, credit ratings are determined not by a single factor but by considering financial system stability and other aspects. While concerns are understandable, it is difficult to judge credit ratings solely based on national debt.

- Do you think the recent sharp rise in real estate prices is due to abundant liquidity or policy failure?

▲ Besides interest rates, supply and demand conditions are important. Housing supply and demand, economic conditions, various government tax policies and real estate-related policies, trust in these policies, and the expectations of economic agents all interact complexly. While it is true that interest rate cuts stimulate housing demand and push prices up, the recent rise in housing prices reflects concerns about housing supply. I believe that expectations about prices have played a significant role depending on various factors.

- The cryptocurrency market is growing and soaring recently, even surpassing the KOSPI, which is an unusual phenomenon. Could this have negative effects?

▲ Cryptocurrencies are characterized by difficulty in determining appropriate levels or prices and very high volatility. If investment in cryptocurrencies becomes excessive, there is a possibility of defaults on related loans to investors. From a financial stability perspective, the risks are indeed significant. We view the increase in cryptocurrency investment with concern.

- Has your stance changed regarding cryptocurrencies being speculative assets?

▲ My position that cryptocurrencies have many limitations as a means of payment and lack intrinsic value has not changed. I believe I am stating facts. Jerome Powell, Chairman of the Fed, seems to share a similar view based on his recent remarks.

- Looking at the current short-term interest rate trend (3-year government bond yield), do you assess that the debt burden on vulnerable groups is limited?

▲ Although market interest rates have risen significantly due to foreign net selling, short-term rates such as COFIX, CD 90-day, and under one-year rates, which greatly affect bank loan rates, have not deviated much, so bank loan rates have so far seen limited increases. However, fixed-rate mortgage loan rates linked to 5-year bank bonds have risen relatively sharply, and credit loan rates have also increased. If market interest rates rise further, they could affect loan rates, increasing funding costs for households and businesses, so we are continuously monitoring interest rate movements.