Lee Chang-yong "In the New Year, Inflation, Economy, and Finance Conflicts Increase... Precise Policy Mix Is Important"

New Year's Address by Lee Chang-yong, Governor of the Bank of Korea

Bank of Korea Governor Lee Chang-yong is explaining the '2022 Second Half Inflation Stabilization Target Operation Status' at the Bank of Korea press room in Jung-gu, Seoul, on December 20 last year. Photo by Joint Press Corps

Lee Chang-yong, Governor of the Bank of Korea, stated that in the new year of 2023, the possibility of conflicts among inflation, the economy, and financial stability will increase, emphasizing that "a sophisticated policy mix will be more important than ever." Regarding the Bank of Korea's monetary policy direction, he explained, "While continuing the policy stance focused on price stability, special attention must also be paid to the stability of financial and foreign exchange markets."

In his New Year's address on the 1st, Governor Lee said, "This year is expected to be a challenging one as high uncertainties both inside and outside our economy continue," adding, "Volatility in international financial markets could greatly expand depending on the monetary policy stance of major central banks, international commodity prices may fluctuate sharply depending on the developments in the Ukraine war, and the impact of China's easing of quarantine measures and changes in the infectious disease situation on the global economy is still difficult to predict."

He continued, "Domestically, the real estate market is rapidly contracting, which could lead to renewed instability in related financial markets," and emphasized, "Moreover, as the effects of interest rate hikes become more pronounced, the possibility of conflicts among inflation, the economy, and financial stability will increase, making a more sophisticated policy mix more important than ever."

Although many experts are concerned about the possibility of the most serious complex crisis ever due to the recent global economic slowdown combined with supply chain restructuring, Governor Lee said there are hopeful aspects to be found within this situation.

He stated, "Last year provided an opportunity to confirm that the external soundness of our economy has improved," emphasizing, "In the second half of last year, the won-dollar exchange rate surged to the mid-1400 won range, leading some to raise concerns that past crisis situations might recur. However, as a result of improvements in risk management systems of the government, companies, and financial institutions through overcoming various crises, the exchange rate gradually stabilized, and contrary to concerns, instability in the foreign exchange sector eased."

Governor Lee said, "This shows that while we should be cautious about the possibility of crises, there is no need to be overly worried and become prematurely discouraged," adding, "In the same context, although there may be difficulties due to the recent contraction in the real estate market, considering the overall soundness of domestic financial institutions, I believe we can overcome this through appropriate policy responses."

Regarding the recently accumulating trade deficit, he said, "This is mainly due to increased imports caused by the sharp rise in international commodity prices, and last year our exports reached a record high," adding, "Although semiconductor exports were sluggish due to price declines, other major items continued to increase last year, so we expect the trade balance to improve rapidly once external conditions recover."

Governor Lee emphasized that while the segmentation of international trade and high interest rate levels in the new year may exacerbate difficulties for our economy, it could also be an opportunity to resolve structural problems that have been postponed so far.

He said, "In responding to the global supply chain restructuring, we need to reduce excessive dependence on the Chinese economy through market diversification," adding, "The high interest rate environment can also serve as a starting point to reduce the high level of household debt and improve the debt structure." He stressed that Korea's real estate-related financial crisis should be turned into a turning point to solve fundamental causes.

Bank of Korea Governor Lee Chang-yong is explaining the status of the price stability target operation at the 2022 second half inflation briefing held at the Bank of Korea press room in Jung-gu, Seoul, on the morning of December 20 last year.
[Image source=Yonhap News]

Governor Lee explained that transparent communication and sophisticated policy responses by the Bank of Korea are necessary for this.

He said, "The Bank of Korea should become one of the trusted pilots for the public based on accumulated experience and a balanced perspective, contributing to the smooth landing of the Korean economy. To do this, it must be able to more accurately assess and predict domestic and international financial and economic conditions," adding, "Through active and transparent communication, objective information about the economic situation and policy direction should be provided to the public."

Regarding next year's monetary policy direction, Governor Lee emphasized, "Since inflation, which is most important to people's lives, is expected to continue rising above the target level, monetary policy should maintain a stance focused on price stability," adding, "While paying special attention to the stability of financial and foreign exchange markets, market stabilization measures should be actively implemented when necessary."

He also stressed active communication with the government. He said, "Policy response measures should be coordinated through close cooperation among relevant authorities," adding, "Going forward, it is necessary to strengthen communication with external parties and take a more proactive attitude regarding our role."

Governor Lee emphasized that efforts to improve the internal organizational culture will also accelerate. He said, "This year, organizational innovation is expected to be fully on track, bringing many changes," adding, "Above all, I hope that by focusing on 'work diet' and concentrating core competencies on high-priority tasks, the qualitative level of work can be improved."