Lee Chang-yong "Final interest rates vary from 3.25% to 3.75%... Discussion on rate cuts is premature"

Bank of Korea Base Rate Raised to 3.25% with Historic 6th Consecutive Increase
Governor Lee Chang-yong: "High Inflation Expected Until First Half of Next Year"
Three Members Favor Final Rate at 3.5%, Two at 3.75%
Market Rates Rise More and Sooner Than Expected

Lee Chang-yong, Governor of the Bank of Korea, is holding a press conference after the Monetary Policy Committee's plenary meeting held on the 24th at the Bank of Korea in Jung-gu, Seoul. [Image source=Yonhap News]

Lee Chang-yong, Governor of the Bank of Korea, stated that while the global economy, including South Korea, is expected to slow down next year, inflation is anticipated to remain at a high level through the first half of next year. Therefore, he explained that it is necessary to maintain the interest rate hike stance for at least three more months. He added that although an excessive interest rate gap between Korea and the U.S. is undesirable, domestic factors take precedence, and the pace of rate hikes will be adjusted considering various situations such as financial stability.

At a press conference held after the Bank of Korea's Monetary Policy Committee (MPC) meeting on monetary policy direction, Governor Lee said, "Regarding future monetary policy operations, since the inflation rate significantly exceeding the target level is expected to persist for a considerable period, it is judged necessary to continue the current stance of raising the base interest rate for the time being."

Regarding the final interest rate level, Governor Lee maintained the previously stated 3.5% level but explained that the situation has changed since the last MPC meeting. He said, "There were many differing opinions among MPC members about the final interest rate level. Three members viewed the final rate as 3.5%, one member believed it should stop at 3.25%, and two members thought it should be open to raising beyond 3.5% up to 3.75%."

He further explained, "The MPC members' forecasts are spread around 3.5%, the same as last time, but this time the discussions have changed significantly because of potential domestic and international changes, meaning that although the final rate level remains at 3.5%, the content of the discussions has changed a lot."

Bank of Korea Governor Lee Chang-yong is presiding over the Monetary Policy Committee plenary meeting at the Bank of Korea in Jung-gu, Seoul on the 24th.
[Image source=Yonhap News]

Discussion on Rate Hikes Premature... Confidence in Inflation Stability Needed

Regarding how long the final interest rate level will be maintained, he said, "It is difficult to set a specific time," adding, "Even after reaching the final interest rate, to lower rates, there must be confidence that inflation has sufficiently converged to our target level. It is premature to discuss when to consider rate cuts."

Governor Lee said, "The resolution stated that the rate hike stance should be maintained 'for the time being,' which we interpret as about three months," adding, "Since there will be no MPC meeting in December, we will assess the direction of monetary policy after reviewing the Federal Reserve's (Fed) Federal Open Market Committee (FOMC) decision next month, its impact on the foreign exchange market, and domestic inflation levels in November and December."

However, Governor Lee emphasized that domestic factors are more important than the Fed's decisions or the Korea-U.S. interest rate gap in determining future monetary policy. He said, "It is excessive to interpret that the Fed takes priority when we decide our interest rates. Our interest rate policy always prioritizes domestic factors." This implies that even if there are risks related to exchange rates or the Korea-U.S. interest rate gap, the pace of rate hikes can be slowed by considering domestic financial market conditions and inflation.

In fact, the MPC pointed out domestic financial market instability in the monetary policy direction resolution by stating, "Interest rates on project financing asset-backed commercial paper (PF-ABCP) in the short-term financial market rose sharply, and trading contracted." Regarding this, Governor Lee said, "Funding in the real estate-related PF-ABCP market remains unstable," adding, "We are continuously discussing with financial authorities whether additional or preemptive policies are needed, and if necessary, the Bank of Korea will also provide additional liquidity."

Lee Chang-yong, Governor of the Bank of Korea, is holding a press conference after the Monetary Policy Committee's plenary meeting held on the 24th at the Bank of Korea in Jung-gu, Seoul.
[Image source=Yonhap News]

Governor Lee Wearing Kim Sowol Necktie: "Market Interest Rates Higher Than Expected"

However, Governor Lee emphasized, "The Bank of Korea always has principles for liquidity supply," adding, "It must not conflict with the Bank's monetary policy, must be provided at rates higher than market interest rates to prevent moral hazard, and the Bank must not bear credit risk through collateral." He said, "To increase the flexibility of monetary policy, we will discuss resolving short-term funding market issues with the government."

Governor Lee expressed concern about the increased interest burden on households and businesses due to consecutive base rate hikes. He said, "While we anticipated that the rate hikes would increase difficulties for various economic agents, we raised rates to reduce future pain caused by high inflation," adding, "Personally, I think market interest rates have risen more and earlier than I expected."

Governor Lee wore a necktie featuring Kim Sowol's poem "Azaleas" that day. When asked if this was a message of consolation for borrowers suffering from increased interest burdens, he replied, "I wore a necktie I like, and that interpretation sounds better," adding, "The Bank of Korea also wants to stabilize interest rates quickly so that the economic situation improves and economic agents' difficulties can be resolved."

Lee Chang-yong, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee plenary meeting held at the Bank of Korea in Jung-gu, Seoul on the 24th. [Image source=Yonhap News]

The Whole World is Struggling... We Should Not Have High Growth Alone

He explained that an economic growth slowdown next year is inevitable. Governor Lee said, "Although we are worried that our economic growth forecast for next year has been lowered to 1.7%, the U.S. growth rate is expected to be 0.3%, and Europe’s -0.2%," adding, "It is difficult for us alone to maintain a high growth rate and low inflation when the whole world is struggling."

Governor Lee said most of the current problems stem from external factors, so there is no need to view the domestic situation negatively and that comparisons with other countries are necessary. He described the Bank of Korea’s downward revision of next year’s economic growth forecast to 1.7% from 2.1% in August as "a conservative figure," adding, "More than 90% of the reasons for the lowered growth forecast are external factors such as the downward revision of major countries' growth rates."

Governor Lee said, "Growth is expected to slow to 1.3% in the first half of next year and recover to about 2.1% in the second half," adding, "We expect China to lift its zero-COVID policy after the first half of next year, the semiconductor industry to recover in the third to fourth quarters, and the global economy to improve."