[The Editors' Verdict] Governor Lee Chang-yong's Driving Skills

Market and Political Circles Expect Rate Cuts
Yielding to Demands Could Shake the Economy
Central Bank Must Steer for Price and Financial Stability

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), who is fighting inflation for the first time in 24 years, is often compared to former Fed Chairman Paul Volcker. Volcker was the figure who tamed the high inflation that plagued the U.S. in the 1970s and 1980s through strong tightening measures.

Unlike the fame of former Chairman Volcker, there is someone regarded as the worst in Fed history. That is Arthur Burns, who served as Fed Chairman during President Richard Nixon’s administration. Burns was a professor of economics at Columbia University and served as chairman of President Dwight Eisenhower’s Council of Economic Advisers from 1953 to 1957. Nixon selected him as the next Fed Chairman at the end of 1969.

Ahead of his 1972 re-election, Nixon pressured Burns to lower interest rates despite inflation concerns. The U.S. federal funds rate, which was 8.71% in January 1970, dropped to 4.82% in just one year. The result was harsh. Combined with the first oil shock in 1973, U.S. prices soared uncontrollably. In 1974, the U.S. Consumer Price Index (CPI) rose to 11.8%.

Experts expect the Bank of Korea to maintain the base interest rate at 3.50% at the regular Monetary Policy Committee meeting on the 25th. If this is as expected, it will be the third consecutive time the base rate is held steady following February and April. This can be interpreted as a signal that the rate hike cycle has effectively ended.

The background for expecting a freeze is as follows. First, inflation is showing a downward stabilization trend. The domestic consumer price index inflation rate for April was 3.7%, marking the first time in 14 months that the figure was in the 3% range. Concerns about an economic recession are also deepening. The Korea Development Institute (KDI) lowered its GDP forecast for this year from 1.8% to 1.5%. The U.S. is also expected to hold rates steady at the Federal Open Market Committee (FOMC) regular meeting in June.

Bank of Korea Governor Lee Chang-yong said right after the February Monetary Policy Committee meeting, "If the fog is thick and you don’t know the direction, shouldn’t you stop the car, wait for the fog to clear, and then look for the road?" This was a statement to block premature expectations that the rate hike period was over. Three months have passed since then. Now, the passengers are starting to urge the driver.

The market is now full of expectations not only for a freeze in the base rate but also for the possibility of rate cuts. Mortgage loan rates at commercial banks have fallen to the 3% range. As a result, the real estate market has started to stir as if it had been waiting. Last month, apartment transactions in Seoul exceeded 3,000 units for the first time in 18 months. Demand is also pouring into major apartment subscription offerings. Liquidity that had been concentrated in bank deposits and savings due to high interest rates at the end of last year is moving into standby funds. The balance of individual money market funds (MMFs) increased to 14.7 trillion won as of the 15th, the highest of the year. Money with nowhere to go is highly likely to jump into real estate at any moment.

With next year’s general election approaching, the government and ruling party will also want to portray an economy that is recovering. However, the purpose of the central bank is the stability of prices and financial markets. The Bank of Korea cannot revive semiconductor exports. Although inflation is on a downward stabilization trend, it still far exceeds the target of 2%. The moment complacency sets in, prices could fluctuate again. If the political sphere and the market act only as expected, the reason for the central bank’s existence will disappear. It is time for Governor Lee Chang-yong to firmly take the wheel again.