[On the Test Bench for the Bank of Korea] Big Step Becoming a Foregone Conclusion... Governor Lee Chang-yong, Will He Become Korea's 'Volcker'?

Interest Rate Inversion Between Korea and US Becomes Reality
Chairman Lee Shifts from Negative to Positive Stance
Decision Possible at This Month's Monetary Policy Committee

'Inflation Fighter' Volcker
Raised Rates to 22% to Tighten Money Supply
Fed Chair Powell Also Follows His Path

[Asia Economy Reporter Seo So-jeong] "Will he become Korea's Tall Paul?"

As analyses suggest that South Korea's consumer price inflation rate could exceed 7% this October, attention is focused on whether Lee Chang-yong, Governor of the Bank of Korea, will take a big step (a 0.50 percentage point hike in the base interest rate) at the Monetary Policy Committee meeting on the 13th and embark on the path of 'Paul Volcker.' Paul Volcker, former chairman of the U.S. Federal Reserve (Fed), was a legendary figure who extinguished the fire of inflation with an ultra-aggressive interest rate hike over 40 years ago. Standing 201 cm tall, Volcker was the tallest Fed chairman in history and was also called 'Tall Paul.' Governor Lee, at 192 cm, is the tallest governor in the history of the Bank of Korea. Especially since South Korea has never before raised interest rates by 0.5 percentage points at once, all eyes are on Governor Lee's stride more than ever. 'Bank of Korea on the Test Bench'

◆Growing Expectations for a Big Step at This Month's Monetary Policy Meeting= The financial market is increasingly taking the big step decision at this Monetary Policy Committee meeting as a given. In June, South Korea's consumer price inflation rate surged to the 6% range for the first time in about 24 years since the foreign exchange crisis. Moreover, if the U.S. Fed follows last month's move with a giant step (a 0.75 percentage point hike) this month, an interest rate inversion between Korea and the U.S. could materialize, potentially triggering capital outflows in earnest.

Governor Lee, who initially held a negative view on a big step right after taking office, has shown noticeably changing views month by month. In a written response submitted to the National Assembly's Planning and Finance Committee ahead of his April confirmation hearing, he dismissed the need for a large adjustment of more than 0.25 percentage points at once, saying, "There is little necessity to adjust the base interest rate by a large margin exceeding 0.25 percentage points at once in Korea." During a tea time with reporters the same month, when asked about being called 'Korea's Volcker,' he candidly replied, "I don't want to be (Volcker)." This implied his preference to avoid shocking the market with high-intensity tightening like Volcker.

However, this statement's validity lasted less than a month. After a breakfast meeting with Deputy Prime Minister for Economy Choo Kyung-ho in May, Governor Lee retracted his previous remarks, saying, "It is not the stage to completely rule out a big step." As concerns grew over prolonged Ukraine conflict and soaring international commodity prices causing inflation instability, along with expectations of continued high-intensity tightening by the U.S., he left all possibilities open. In last month's 72nd anniversary speech of the Bank of Korea, he went further, stating, "Korea's response cannot be considered preemptive at this point." As domestic inflation surges, Governor Lee's tone has also gradually hardened.

Paul Volcker, former Chairman of the U.S. Federal Reserve (Fed)

◆How Volcker Controlled Inflation= Even in the U.S., which is fighting high inflation for the first time in over 40 years, Jerome Powell, Fed Chairman, is following Volcker's path. Born in 1927 as a descendant of German immigrants, Volcker graduated from Princeton University, Harvard Graduate School, and the London School of Economics (LSE). He worked at Chase Manhattan Bank, the U.S. Treasury, and the Federal Reserve Bank of New York. Later, he served as Fed Chairman from August 1979 to August 1987 during the Jimmy Carter and Ronald Reagan administrations and was nicknamed the 'Inflation Fighter.' To curb inflation that soared to the mid-teens in 1980, he implemented interest rate hikes, raising rates up to 22%, tightening the money supply.

Of course, side effects were rampant. Amid the second oil shock in 1979, with soaring prices, the ultra-high interest rate policy led to economic recession and a wave of corporate bankruptcies. Unemployment surged, with the rate exceeding 10%, facing strong resistance. However, Volcker did not stop the interest rate hike policy. Due to continuous death threats, he even carried a pistol for self-defense.

After three years of fierce struggle, the U.S. consumer price index inflation rate, which reached 14.7% in 1980, dropped to 2.5% by July 1983. He maintained interest rates above 6% throughout his term. This also deflated the real estate market bubble. Thanks to Volcker's strong high-interest rate policy, the U.S. achieved both price stability and industrial restructuring, leading to the greatest economic boom in U.S. history in the 1990s. Chairman Powell praised Volcker as "a great bureaucrat" and expressed hope that history would record him similarly.