[Q&A] Lee Chang-yong "The belief that real estate is invincible must be reconsidered"

Bank of Korea Governor Broadcast Reporters Invitation Debate Meeting

Lee Chang-yong, Governor of the Bank of Korea, stated that he cannot guarantee that the past upward trend in housing prices will continue in the future and emphasized the need for cautious investment decisions. However, he explained that the pace of housing price declines has somewhat eased in January and February this year, suggesting the possibility of a soft landing.

At a discussion hosted by the Broadcast Journalists Club held at the Broadcasting Hall in Mok-dong, Yangcheon-gu, Seoul on the 7th, Governor Lee responded to the question, "What advice would you give if your children want to buy a house with a loan?" by saying, "There seems to be a prevailing view that real estate is invincible and investing in it guarantees success," adding, "However, considering factors like aging, we need to reconsider the assumption that past trends will continue into the future."

Regarding the timing of interest rate cuts by the Bank of Korea, he said it is "premature" and emphasized, "It is desirable to discuss rate cuts only when there is confidence that the long-term inflation target of 2% is being approached." He explained that the current situation calls for deliberation on whether to raise or maintain the base rate, not to consider lowering it.

Governor Lee described ChatGPT technology as a "game changer." He said, "If ChatGPT spreads worldwide, information in English documents may come to be seen as truth," adding, "It has become an important contemporary challenge for us to write and upload our thoughts in English."

Lee Chang-yong, Governor of the Bank of Korea (center), is speaking at the Broadcasting Reporters Club invitation debate held on the 7th at the Broadcasting Hall in Yangcheon-gu, Seoul.
[Photo by Yonhap News]

-The base interest rate hike has stopped after a year and a half. Some analyses suggest that the focus has shifted from inflation to preventing an economic recession. Do you agree with this?

▲There are two reasons for freezing the rate at 3.5% this time. First, after the interest rate has risen about 3 percentage points over the past year and a half, it was time to assess its impact on our inflation trajectory. Our forecast is that inflation dropped to 4.8% in February, is expected to be below 4.5% after March, and will be in the low 3% range by year-end. Second, due to various uncertainties such as U.S. monetary policy, the Ukraine war, China's economic recovery, and the domestic real estate market situation, the Monetary Policy Committee members agreed to observe developments before deciding whether to raise or maintain rates. If there were concerns about the economy, lowering rates would have been discussed, but since the current situation is whether to raise or hold, the priority is inflation and financial stability rather than the economy.

-With expectations that the U.S. will continue raising rates, some say the freeze reflects government policies focusing on economic recovery, possibly pressuring the Bank of Korea. Do you feel pressured if the government prioritizes economic stimulus?

▲I do not think the policy directions of the government and the Bank of Korea differ. Both believe that since inflation is still close to 5%, economic policies should focus on price stability. Although there is a historical background between the Bank and the government, and some say it is better not to meet to preserve the Bank's independence, I have seen central banks and governments abroad discuss policies together multiple times. We plan to discuss economic policies with the government, review pros and cons, and decide on interest rates accordingly.

-When do you expect the Korean economy to hit bottom due to the aftereffects of interest rate hikes?

▲Currently, we forecast 1.6% growth this year, with about 1.1% growth in the first half and around 2% in the second half. The downward trend is expected to continue until the first half, with a rebound starting in the third quarter. However, this rebound is not expected to be rapid or exceed our potential growth rate of 2%, but rather a gradual recovery.

-At what inflation level can discussions about interest rate cuts begin?

▲It is premature to discuss rate cuts now. Inflation is still in the high 4% range. Until we see if inflation converges to the 3% range by the end of this year, we need to consider whether to raise or maintain rates. It is appropriate to discuss rate cuts only when there is confidence that inflation is converging to the long-term target of 2%.

-The interest rate gap with the U.S. is expected to exceed a historic high of 1.5 percentage points. Is the Bank of Korea able to manage foreign exchange market trends caused by this rate differential?

▲According to economic theory, the interest rate gap is just one of many factors determining exchange rates. Rather than the rate gap itself driving exchange rate movements, the duration of the dollar's strength has a greater impact now. U.S. monetary policy is uncertain, and many think even if rates rise, they won't do so rapidly. However, if the rate gap becomes too large, unexpected side effects may occur, and if there is excessive concentration, we will respond accordingly.

Bank of Korea Governor Lee Chang-yong is answering questions from the press at the Monetary Policy Direction press conference held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 23rd of last month.
[Image source=Yonhap News]

-When and at what level do you expect the U.S. interest rate peak?

▲I will closely watch what Federal Reserve Chair Jerome Powell says to Congress the day after tomorrow. Until January, the market expected the final rate to be around 5%, but now it seems to accept 5.25?5.5%, and some market participants think it could go higher. There is significant uncertainty.

-When do you expect the peak of our base interest rate?

▲At the last Monetary Policy Committee meeting, five out of six members agreed to keep open the possibility of rates rising to 3.75%. Regarding what to do three months later, most members agreed to decide based on major countries' rate decisions and data. The final rate will be discussed further at the next meeting.

-The government forecasts a "high-low" economic pattern this year. With the U.S. likely to implement "big steps" and public utility rate hikes postponed to the second half, do you think it is appropriate to present optimism about economic recovery in the second half to the public?

▲Compared to December last year, there are more positive factors now. The debate about further U.S. rate hikes arises because the U.S. economy is not as bad as expected. While higher U.S. rates would shock our financial markets, they have a positive effect on our exports and real economy. Also, China's higher growth rate is overall a plus for us. Europe is also better than expected. Our forecasted 1.6% growth this year carries both downside and upside risks.

-China's economic growth forecast has dropped to around 5%, the lowest since 1994. If China shifts to low growth, our economy will inevitably be hit hard.

▲We have gained much growth momentum from the China boom over the past decade. However, China's competitiveness has risen, and there is U.S.-China tension. China's economic impact on Korea will not be as strong as before. We need to move away from overdependence on China. China's economic recovery alone cannot fully revive our economy. Still, China's growth from 3% last year to 5% this year is positive for Korea.

-After the Bank of Korea's rate freeze last month, the won-dollar exchange rate rose nearly 2% within three days, and foreign funds exited. How do you assess the current exchange rate trend?

▲Many attribute the rise from 1,230?1,240 won to over 1,300 won to the rate freeze. However, we cannot simultaneously control exchange rates, interest rates, and maintain foreign reserves perfectly. The exchange rate change after the rate freeze was mainly due to a rapid shift in expectations about U.S. monetary policy, causing a strong dollar. The subsequent slight decline was influenced by China's economic reopening. The current exchange rate is not a cause for concern.

-Our economy is vulnerable if exports, especially semiconductors, perform poorly. Are there ways to overcome this?

▲The semiconductor industry is linked to U.S.-China tensions and the "Chip 4 Alliance," making it a political as well as economic issue. Last year, semiconductor export volumes did not decline, but prices dropped about 45%. In January, both volume and prices fell about 9%. The semiconductor market is still in a downward trend. Experts expect recovery after the third quarter this year.

-As a financial expert, what measures do you think are needed to resolve the banking oligopoly system?

▲Since banking is a licensed industry, it is natural to prevent side effects from oligopoly. The government should intervene in disclosing loan-to-deposit ratios and require banks to invest profits for stability instead of paying them as employee bonuses. However, solutions should not excessively hinder banking industry development or the private sector.

-The government has effectively lifted most real estate regulations, yet concerns about a hard landing in housing prices remain. Do you think current housing prices in Korea are appropriate, or should they fall further?

▲Housing prices vary greatly by region, so it is difficult to generalize. However, a sharp drop in housing prices could harm financial stability. Prices rose about 40% over the past two years, then fell 19?20% last year, and are currently adjusting due to high interest rates. Fortunately, the decline slowed somewhat in January and February, suggesting a possible soft landing.

-Should housing prices fall back to the 2017?2018 levels, effectively returning the 40% gains, to normalize?

▲No. There is a large gap between Seoul and other regions, so we do not target an average figure.

Lee Chang-yong, Governor of the Bank of Korea, adjusts his glasses during a press conference held after the Monetary Policy Committee meeting at the Bank of Korea in Jung-gu, Seoul, on the morning of the 23rd of last month.
[Image source=Yonhap News]

-How do you view the household debt issue?

▲It is a very important issue. Most household debt in Korea is secured by real estate, and historically delinquency rates have been low, so it is generally considered manageable. However, the low delinquency rate is partly due to loan maturity extensions during the COVID-19 period. High household debt may constrain consumption and further reduce already low growth potential. Policies to prevent further increases in household loans in the medium to long term are important.

-If your child wanted to buy a house in Seoul by borrowing half the price, what advice would you give?

▲There is a prevailing belief in Korea that real estate is invincible and investing in it guarantees success, so many see it as a financial asset. This is partly because there were few other investment options in Korea. However, considering aging and other factors, one should reconsider the assumption that past trends will continue. Especially considering interest rates, I would advise young people to carefully consider their capabilities and manage assets prudently.

-There is much interest in cryptocurrency investment as an alternative. Did you invest in cryptocurrency during the boom?

▲I did not invest in cryptocurrency. It is risky as an investment. I am concerned that about 16% of the population has cryptocurrency accounts. However, it is desirable to keep open the possibility of creating new industries through cryptocurrency technology.

-There is strong public interest in ChatGPT. How is the Bank of Korea responding to technological progress?

▲It is a game changer, especially when discussed in English. I was surprised. It will continue to develop rapidly and cannot be ignored. We are reviewing how to use it in our operations within the Bank of Korea network. As ChatGPT spreads globally, information in English documents may be perceived as truth. Since our documents are less translated into English, opposing views may dominate. Writing our thoughts in English has become an important contemporary challenge.