[Q&A] Lee Chang-yong "Soft Landing of Household Debt, Why I Became Governor... Be Cautious with Real Estate Investment"

Lee Chang-yong, BOK Governor, Q&A at Press Conference
"Young Generation Has Not Experienced Inflation"
"Be Cautious If You Bought a House Expecting Low Interest Rates to Continue"

Lee Chang-yong, Governor of the Bank of Korea, is attending the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 24th. / Photo by Joint Press Corps

Lee Chang-yong, Governor of the Bank of Korea, emphasized, "The reason I became the Governor of the Bank of Korea is to ensure a soft landing of household debt," and stated that he will strive to reduce the household debt ratio relative to the Gross Domestic Product (GDP).

Governor Lee made these remarks during a press conference held immediately after the Monetary Policy Committee meeting on the 24th. On that day, the Monetary Policy Committee kept the base interest rate steady at 3.5% per annum for the fifth consecutive time. The economic growth forecast for this year was maintained at 1.4%, but the growth forecast for next year was lowered by 0.1 percentage points to 2.2%.

Governor Lee explained, "What worries me is that if household debt rises further from the current level, it could significantly hinder growth potential," adding, "I believe we have already surpassed that level. However, lowering the household debt ratio too quickly could cause side effects, so it needs to be reduced gradually."

He said that the recent increase in household debt is due to the widespread perception that housing prices have bottomed out amid expectations of interest rate cuts. He advised the younger generation, who are buying homes with borrowed money, to "be cautious as low interest rates may not return."

Governor Lee pointed out, "The younger generation today has not experienced inflation, so if they bought homes thinking that low interest rates would return, they need to be very careful," and added, "If you bought by borrowing money, the financial costs are unlikely to fall to the 1-2% levels seen in the past decade, so you should consider this when investing in real estate."

Regarding expectations of interest rate cuts within the year, he reiterated, "Currently, the focus is rather on the possibility of interest rate hikes, so it is premature to discuss rate cuts."

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 24th, striking the gavel. / Photo by Joint Press Corps

Below is a Q&A session with Governor Lee.

- On the 22nd, during a current affairs inquiry at the National Assembly's Planning and Finance Committee, you mentioned that strong measures would be taken to prevent further increases in household debt. What specific measures can be taken?

▲ Household debt has increased more than expected over the past two months. Since October, interest rates have been raised to stabilize prices, and various (real estate) deregulation policies have been implemented to prevent financial instability. As a result, the possibility of a soft landing in the real estate market has increased, but household debt has also risen. Household debt policies cannot be implemented by the Bank of Korea alone; they must be coordinated with government authorities. There is a consensus among policymakers to gradually reduce household debt to prevent the household debt ratio relative to GDP from rising. We will try to adjust household debt flows on a micro level, and if the market response is insufficient, macro policies may be considered, but we are not at that stage yet.

- Although the base interest rate was kept steady, there are talks that the policy changes have caused contrasting fortunes for homeowners and non-homeowners. What is your view?

▲ It is natural that some people lose and others gain due to real estate prices. When we conduct monetary policy, we do not target real estate prices themselves, nor should we. Increasing household debt behind rising real estate prices can undermine financial market stability and, in the long term, weaken the country's growth potential. Therefore, we pay attention to the increase in household debt. Issues related to rising real estate prices should be addressed through other micro-level policy tools.

- What is the main cause of the current increase in household debt?

▲ There seems to be a widespread perception that interest rates will fall further, and since housing prices have bottomed out, people are taking out loans to buy homes. Additionally, the use of 50-year loans to circumvent DSR (Debt Service Ratio) regulations has also played a role. Interest rates have been very low for the past decade, and the younger generation has not experienced inflation. If they bought homes thinking interest rates would return to those low levels, they need to be very cautious. If you bought by borrowing money, the financial costs are unlikely to fall to the 1-2% levels seen in the past decade, so you should consider whether you can afford it before investing in real estate.

- There are concerns that if the household debt ratio rises further, the country's credit rating could be downgraded. What is your view?

▲ The country's credit rating is influenced by many factors beyond household debt. What worries me more than a credit rating downgrade is that if household debt rises further, it could significantly hinder growth potential. I believe we have already surpassed that level. However, lowering the household debt ratio too quickly could cause side effects, so it needs to be reduced gradually. When I first took office as Governor of the Bank of Korea, I emphasized in my inaugural speech that my long-term focus would be on the soft landing of household debt. I believe that ensuring a soft landing of household debt is the reason I became Governor, and I will fulfill that responsibility.

- What are the Monetary Policy Committee members' interest rate forecasts for the next three months? Is it likely that the base interest rate will remain steady within the year?

▲ All six Monetary Policy Committee members agree that the possibility of raising the final interest rate to 3.75% should remain open for the time being. There is significant uncertainty regarding the U.S. Federal Reserve's monetary policy. Depending on how long the U.S. tightening monetary policy continues, volatility in the foreign exchange market could increase significantly. We also need to monitor whether the increase in household loans continues. Currently, the focus is on the possibility of interest rate hikes, so it is premature to discuss rate cuts.

- Recently, the timing of U.S. interest rate cuts has been delayed. Can we assume that the Bank of Korea will not cut rates until the first half of next year?

▲ I cannot specify a period for whether rates will be cut or maintained. We need to decide while observing whether inflation will follow our expectations and how household debt and the financial stability of non-financial institutions will continue.

Bank of Korea Governor Lee Chang-yong is presiding over the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 24th. / Photo by Joint Press Corps

- The debate over the 2% inflation target has reignited in the U.S. Could Korea's high-intensity tightening to stabilize prices worsen the economic situation?

▲ There has been ongoing debate in the U.S. about whether the 2% target is appropriate. Some argue that if the central bank's target interest rate is above 2%, it could have more room to maneuver policy tools when low inflation returns. Theoretically, this is worth considering, but changing the target during the current inflation adjustment process could cause side effects, so most central bank governors agree that now is not the right time for that discussion. Also, we are not trying to reach 2% immediately but gradually, so I do not think the current rate will cause a sharp economic slowdown.

- Considering recent increases in loans and money supply in Korea, can we say that the current interest rates are still in a tightening range?

▲ I believe so. Various models show that Korea's rates are at or above the upper bound of the tightening range. When looking at real interest rates (nominal interest rate minus inflation rate) over time, Korea's rates are higher than those of any advanced country except the U.S. Financial condition indices considering various price variables also indicate that Korea's interest rate level is generally in a tightening phase.

- Some say Korea could cut rates earlier than the Fed since it raised rates first, while others disagree. What is your opinion?

▲ No one can predict whether Korea will cut rates before or after the U.S. We will assess the situation at that time. It is true that we face constraints when the U.S. maintains a tightening monetary policy stance. If you ask me now whether we can cut rates before the U.S., I cannot say. We need to discuss with Monetary Policy Committee members how to respond if the U.S. continues its tightening stance.

- Should we be concerned about the current volatility in the won-dollar exchange rate?

▲ The current situation is not worrisome. The recent rise in the exchange rate is due to a stronger dollar and weaker yuan and yen. Overall, it is not a level of concern, but volatility has increased. More important than the interest rate gap between Korea and the U.S. is whether the Fed will continue its tightening stance. If the Fed announces a final rate much higher than market expectations, the market could experience significant volatility. In such cases, we need to reduce volatility through various micro-level market interventions as well as interest rate measures.

- Why was this year's growth forecast (1.4%) maintained while next year's forecast was lowered to 2.2%?

▲ I understand that much attention is focused on the recent slowdown in China's economy, but the current level is not significantly different from previous growth forecasts for China. The increased uncertainty has raised the possibility of a recession in China. The lowered growth forecast for next year reflects the likelihood that China's rapid economic recovery will be difficult given various market conditions. On the other hand, only four months remain this year. Even if there is a shock, its impact will be limited to a quarter, so there is no strong reason to adjust this year's growth forecast significantly. We will provide more detailed comments in October after observing factors such as China, the U.S., oil prices, and U.S. interest rate decisions.

- Has the focus of the Bank of Korea's monetary policy shifted from inflation to growth?

▲ Price stability is our top priority, followed by financial stability. Although the 1.4% economic growth rate is very low, this is a global trend, not unique to Korea. Deputy Prime Minister Choo Kyung-ho said, "In the current international economic situation, structural reform is more important than raising growth by 0.1 percentage points through fiscal measures." I do not think we need to compensate with interest rates or fiscal policy just because our growth rate is low.