[Q&A] Lee Chang-yong: "If Household Debt Rises Too Much, We Will Respond with Interest Rates... No Discussion of Rate Cuts"

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 13th.
[Photo by Yonhap News]

Lee Chang-yong, Governor of the Bank of Korea, stated that if household loans such as mortgage loans increase unexpectedly rapidly, they can respond by raising the base interest rate. All members of the Monetary Policy Committee hold the view that the possibility of raising the base rate once more to 3.75% per annum in the future should be kept open, and he explained that there is currently no discussion of lowering interest rates.

Governor Lee made these remarks at a press conference held immediately after the Monetary Policy Committee's monetary policy direction meeting on the 13th. On that day, the Monetary Policy Committee kept the base interest rate steady at 3.5% per annum. This marks the fourth consecutive freeze.

Governor Lee said, "If household debt increases too much, there should be an option to raise the base interest rate," adding, "Theoretically, the possibility of raising interest rates has not disappeared."

However, he emphasized that if household debt is adjusted sharply in the short term, problems such as real estate project financing (PF) crises or reverse jeonse (key money deposit) difficulties may arise, so micro-level liquidity support policies along with macro-level efforts to reduce household debt are necessary.

Regarding South Korea's nominal gross domestic product (GDP) ranking falling to 13th in the world last year, he explained, "Short-term ranking changes due to exchange rate fluctuations can change at any time," and added, "Structural issues such as aging and low birth rates are more concerning."

On the timing of interest rate cuts, he reiterated the existing stance that "discussion can only take place when there is confidence that the inflation rate sufficiently converges to the target of 2%," and said, "There is no one among the Monetary Policy Committee members who is currently talking about lowering interest rates."

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Committee plenary meeting at the Bank of Korea in Jung-gu, Seoul, on the morning of the 13th. Photo by Joint Press Corps

Below is a Q&A session with Governor Lee at the press conference that day.

- Household debt is increasing; is it not yet at a level requiring a response? Do you think it is necessary to respond to household debt with interest rate hikes?

▲ At this Monetary Policy Committee meeting, several members expressed significant concern about the increase in household debt. In South Korea, the ratio of household debt to GDP has continued to rise over the past several decades except during a few crises. If the household debt ratio rises further, it becomes a major risk factor for our economy. However, if household debt is already high, attempting a sharp short-term adjustment can cause unintended problems. Recent real estate PF crises and reverse jeonse difficulties are examples of this. Therefore, currently, micro-level liquidity support measures to open up funding flows for a soft landing of the real estate market are needed, while medium- to long-term macro-level responses to reduce household debt are also necessary. Theoretically, if household debt increases unexpectedly significantly, responses can be made not only through interest rates but also by strengthening macroprudential regulations.

- If the interest rate gap with the U.S. widens further but the exchange rate remains stable, is that acceptable?

▲ The exchange rate does not depend solely on interest rate differentials. Looking at the current situation, as the semiconductor industry improves, foreign bond funds are flowing in, and foreign currency supply conditions have improved, the exchange rate has declined despite the widening Korea-U.S. interest rate gap. We do pay attention to interest rate differentials, but that is not everything.

- You mentioned strengthening supervisory authority over non-bank sectors in your inaugural speech. Since supervision and liquidity support should be discussed together, how is this progressing?

▲ We need to consider legally what can be done regarding supervisory authority. However, just because we lack supervisory authority does not mean we do nothing and remain idle. Liquidity supply has two aspects: one with sufficient collateral and one without collateral. If liquidity is provided without collateral, more constraints are necessary. Even before legal amendments, we are reviewing what the Bank of Korea can do. We are also consulting with Monetary Policy Committee members.

- With four consecutive interest rate freezes, market expectations for rate cuts within the year are growing. What is the stance of the Monetary Policy Committee members on future monetary policy?

▲ We cannot specify a timing and say we will cut rates within the year. Interest rate cuts will be discussed when there is confidence that the inflation rate sufficiently converges to the 2% target. It is not desirable to provide forward guidance specifying timing, whether at year-end or otherwise. All six Monetary Policy Committee members hold the view that the possibility of raising the rate to 3.75% should be kept open. We need to see how many more times the Fed will raise rates. Although inflation is slowing as expected, core inflation remains high, and household debt movements are uncertain.

- The current account has turned positive and the trade balance is improving, but semiconductor export performance remains sluggish. When can we expect effects from China's reopening?

▲ China is very difficult to predict. Since the last Monetary Policy Committee meeting in May, the U.S. economy's soft landing prospects have improved, helping our growth, but uncertainty around the Chinese economy has increased.

Lee Chang-yong, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee meeting held on the 13th at the Bank of Korea in Jung-gu, Seoul.
[Photo by Yonhap News]

- Last year, nominal GDP in dollar terms dropped three places from the previous year. There are concerns that re-entering the top 10 will be difficult given future growth and exchange rates. How do you assess this?

▲ South Korea's nominal GDP ranking fell to 13th last year due to short-term ranking changes caused by exchange rates. We are an energy-dependent country, but Russia, Brazil, and Australia, which rose in ranking, are energy exporters. They were unaffected by exchange rate impacts, so our ranking dropped. Short-term ranking changes due to exchange rate fluctuations can change at any time, but structural issues such as aging and low birth rates are more concerning. Low birth rates are not a predetermined future; they can change significantly depending on how we implement structural reforms.

- Last year, issues such as the Legoland incident, reverse jeonse problems, and the Saemaeul Geumgo (New Village Credit Cooperative) crisis continued under the same real estate leverage scenario. Even if the Saemaeul Geumgo crisis settles, is there a possibility of problems emerging from other weak links?

▲ Because real estate leverage was high in the past, the adjustment process cannot be smooth. However, unlike before, fortunately, there is no situation where a specific sector is in crisis. Within Saemaeul Geumgo, there are healthy institutions and risky ones. Since it is an issue of individual institutions rather than a specific sector, it can be managed adequately by addressing them in order.

- Despite the Bank of Korea's continued tightening, mortgage loans increased by more than 7 trillion won in a month due to government deregulation. Some say the impact of the Bank of Korea's monetary policy has weakened. What is your view?

▲ When implementing micro-level policies that support liquidity, if they lead to an increase in household debt at the macro level, efforts should be made through countermeasures to prevent that. I believe the government shares this consensus. Depending on the focus, some may evaluate that policy coordination is working well, while others may see monetary policy as weakened.

- Are public utility price increases, such as the Seoul subway fare hike, likely to have a real impact on inflation?

▲ Not only subway fares but also electricity and gas prices have risen to an extent that we included in our inflation forecast at the beginning of the year. If there are additional increases in the future, adjustments will be necessary. Since core inflation's future path is uncertain, we need to reassess around year-end whether inflation will fall to 2% next year.

- If the Bank of Korea can raise interest rates, what would be the reasons? What are the variables for future monetary policy?

▲ The biggest reason the Monetary Policy Committee members agreed to keep the possibility of rate hikes open is the exchange rate. We need to see how U.S. monetary policy changes and how that affects the exchange rate. I do not think the risks have diminished much yet. Although not immediately, due to interest rate differentials and foreign exchange market instability, there is a possibility of raising the base rate. The government will try to prevent a sharp increase in household debt, but if it rises too much, there should be an option to raise the base rate. Theoretically, the possibility of raising rates has not disappeared.