Lee Chang-yong "There Are Opinions for Interest Rate Cuts... But Decisions Will Be Made Independently" [Q&A]

Price Stability Target Operation Status Briefing
"Interest Rate Opinions Obtained as Information... Will Decide Independently"
"Even If Inflation Rate Is Adjusted, Structural Solutions Are Needed for Price Levels"

[Image source=Yonhap News]

Lee Chang-yong, Governor of the Bank of Korea, on the 18th, regarding recent opinions about interest rate cuts, said, "I am listening to the opinions of various experts on interest rates as information," and added, "(Interest rate cuts) will be independently decided based on the opinions of the Monetary Policy Committee members."

Governor Lee attended the 'Price Stability Target Operation Status Review Briefing' held at the Bank of Korea headquarters in Jung-gu, Seoul, and in response to Sung Tae-yoon, Chief of Policy Office at the Presidential Office, stating that "the environment for interest rate cuts has been created," he said, "If any expert gives an opinion, the Monetary Policy Committee (MPC) can consider and decide. Exchanging opinions and independently deciding by each responsible institution while sharing information should not be blocked."

Regarding the recent high inflation felt by the public, he said, "Perceived inflation is influenced not only by the inflation rate but also by the price level," adding, "The Bank of Korea controls the inflation rate to maintain price stability, but the price level is determined by various structural factors."

He continued, "The Bank of Korea presents opinions on what structural solutions are needed," and "Based on this, it is up to each government ministry to decide the appropriate pace of policy changes."

Below is the Q&A from the briefing.

- You mentioned that the reason why prices for food, clothing, and housing in Korea remain higher than the OECD average is due to structural factors. However, structural factors are not easy to overcome and seem likely to continue pushing prices up. Should the price level be maintained at 2%, or should it be raised?

▲(Kim Woong, Deputy Governor) It is necessary to distinguish between the inflation rate and the price level. The central bank targets the inflation rate. The report referred to the price level. The inflation rate is addressed through monetary policy, but issues like persistently high living costs require structural improvements. From that perspective, I think it is not desirable to change the 2% inflation target.

- Does the price stability target review meeting mean managing the inflation rate at 2% in the medium to long term? Or does it include stable management considering the price level as well? If the latter, is it appropriate for only the Bank of Korea to hold price meetings when monetary policy alone cannot solve it?

▲(Governor Lee Chang-yong) That is an accurate expression. If the price level itself is the target, it is correct that consultation with various departments is necessary. While controlling the inflation rate and maintaining price stability, the price level is determined by various structural factors. From the Bank of Korea's standpoint, it presents opinions on what structural solutions are needed, and based on this, each ministry decides the appropriate pace of policy changes.

- Recently, Sung Tae-yoon, Chief of Policy Office at the Presidential Office, stated that "prices have stabilized, and the environment for interest rate cuts has been created." What do you think about his remarks?

▲(Lee Chang-yong) Regarding the direction of the Bank of Korea's monetary policy, we obtain information through various channels and share it with MPC members to make interest rate decisions. Not only the Chief of Policy Office but any expert who provides opinions can be considered by the MPC for decision-making. The Bank of Korea also provides opinions on agricultural product prices. I believe exchanging opinions and independently deciding by each responsible institution while sharing information should not be blocked.

- Do policies such as agricultural protection and suppression of public utility fee increases distort the price level?

▲(Lee Chang-yong) The expression that the price level is distorted is not accurate. Prices cannot be the same in every country. Countries with limited production areas have higher agricultural prices. The high real estate prices in Korea are similar. However, if prices differ, it is important to understand why, who benefits and loses from policies, what side effects may arise from continuing policies, where policy costs come from, and how maintaining agricultural prices benefits producers but may harm consumers. The Bank of Korea's report provides information on the pros and cons of policies rather than stating that some policies cause more distortion.

- The price stability target operation status report emphasizes the trend of price deceleration. Has confidence in the slowdown increased compared to the previous Monetary Policy Report?

▲(Lee Chang-yong) Rather than emphasizing price deceleration, it means that core inflation fell to 2.2% as expected, and headline inflation also decreased, following the anticipated trend. Saying it is following the expected trend is appropriate.

- The issue note mentioned solutions such as diversifying agricultural distribution channels. There seem to be many practical constraints like opposition from farmers and side effects. What do you think about this?

▲(Lee Ji-ho, Director of Research Department) Improving and streamlining the distribution structure means ensuring farmers receive fair prices at production sites and consumers can consume at reasonable and stable prices. While there will be benefits and disadvantages depending on groups, fundamentally, agriculture is moving in that direction.

- Regarding public utility fees, the report mentioned "gradual normalization" for supply sustainability. If normalization occurs, how should its impact on prices be prepared for?

▲(Lee Ji-ho) This is connected to the reduction of fuel tax cuts. When a large energy shock occurs, temporary buffering measures are taken, followed by gradual normalization. If fees are increased gradually rather than abruptly, the impact on prices is expected to be limited.

- The issue note stated that housing costs, such as the price-to-income ratio, are higher in Korea than in other countries. About three years ago, there was discussion about including owner-occupied housing costs in the consumer price index calculation. Was there any discussion this time?

▲(Lee Chang-yong) Considering Korea's land area, it is natural that housing costs and prices are high. There have been many suggestions to increase their weight in the consumer price index. However, there are pros and cons. When reflecting housing price changes, the speed of decline is rapid, which may fail to capture other price changes. This is why the U.S. uses the Personal Consumption Expenditures Price Index (PCE) instead of the headline Consumer Price Index (CPI), as the latter may not adequately reflect representative price movements. Korea also has pros and cons about adopting this just because the U.S. does.

= However, it is true that the current CPI in Korea has a low weight for housing costs, so the impact of housing costs is assessed through supplementary indicators.

- You mentioned discussing the agricultural price structure with government ministries. What discussions have you had with agricultural authorities regarding import liberalization?

▲(Lee Chang-yong) We have not proposed whether to liberalize imports or not. By clarifying why Korean agricultural prices are high and the reasons behind it, we provide information to the Ministry of Agriculture, Food and Rural Affairs. The position is to identify structural problems to assist policy decisions.

▲(Lee Chang-yong) There is a perception that structural problems should be solved through monetary policy. Price stability is the Bank of Korea's goal. However, the price stability we consider is indirectly achieved by stabilizing the inflation rate. When people say, "Core inflation has fallen to 2.2%, but the price level is still high, so what is the Bank of Korea doing?" we believe monetary policy alone has limitations. Therefore, we hope other government ministries will solve these structural problems in the medium to long term.

- Recently, there has been an evaluation that the exchange rate has stabilized in the 1,300 won range. What do you consider an appropriate exchange rate?

▲(Lee Chang-yong) I do not hold the view that there is an appropriate exchange rate level. As far as I know, there is no model in economics to determine an appropriate exchange rate. However, we assess what level is appropriate to reduce volatility. I want to emphasize that we are interested in minimizing volatility as much as possible.

- Regarding agricultural products, you said you are not advocating imports. According to the report, what percentage of the higher apple prices compared to the OECD average is due to imports and distribution structure, respectively?

▲(Lee Chang-yong) I think imports are necessary, but I do not have a view on the degree or speed of imports. If the entire supply, like apples, is not imported, while it may be a good policy to protect farmers, volatility can be very high. Therefore, I believe promoting diversification of imports is better. The Ministry of Agriculture, Food and Rural Affairs should handle subsidies for farmers and consumer protection regarding the level and speed of import promotion.

- You mentioned that short-term restraint on public utility fee increases is inevitable. What period does "short-term" refer to?

▲(Kim Woong) The government's adjustment of public utility fees is smoothing. Fuel tax cuts are an example. When oil prices are high, fuel taxes are adjusted to prevent spillover. Conversely, when oil prices stabilize, some fuel tax is restored. Smoothing is determined according to oil price trends.

▲(Lee Ji-ho) Recently, oil prices have fallen, so there is more room for adjustment. The short-term concept refers to buffering rapid price fluctuations.

- Recently, domestic fruit prices have soared more than imported fruits. Considering the recent period, is it possible that distribution structure has a greater impact than channels?

▲(Lee Ji-ho) It is difficult to replace apples or pears with tropical fruits like mangoes or bananas due to differences in texture and eating habits. If tropical fruits are included among recently imported fruits, they may help stabilize fruit prices, but the effect is expected to be smaller than initially anticipated.

- The issue note mentioned that Korea's preference for luxury goods raises clothing prices and that improving the distribution structure could help. On the other hand, is it really a problem that can be solved by improving the distribution structure?

▲(Lee Ji-ho) Judging preferences for luxury or non-luxury goods was not our concern. Since prices are formed at a high level due to various factors, when considering how to prevent further price increases, there is no better alternative than strengthening reliability in online distribution and other distribution structure aspects. We are not suggesting what to do about preferences but speaking from the perspective of price stabilization.

▲(Lee Chang-yong) It is very rare for a country like ours where everyone buys the same brand at once when a brand becomes popular.

- You mentioned the gap between consumers' perceived price levels and inflation rates. In the future, should the government's or political circles' definition of inflation and the Bank of Korea's responsibility for price stability be understood differently?

▲(Lee Chang-yong) The Bank of Korea is responsible for targeting the inflation rate. However, the price level is a structural factor, so it is not that the Bank of Korea is uninterested. When the inflation rate is high, the price level rises, and even if the inflation rate is low, a high price level cannot be resolved. Naturally, the Bank of Korea strives to manage the inflation rate, but the inflation perceived by the public is influenced by both the inflation rate and the price level. This issue cannot be solved by the Bank of Korea alone, so efforts among various ministries are needed. Structural problems involve groups that benefit and groups that lose, making it difficult, but understanding is necessary to solve them. That is our message.

- There has been much talk recently about interest rate cuts. You forecasted a slowdown in inflation in the second half. Can it be seen as a step closer to an interest rate cut? What is your outlook on interest rate cuts?

▲(Lee Chang-yong) It is difficult to comment before the July Monetary Policy Report. The path is proceeding at the same level as discussed in May, but there may be various opinions on whether this level means inflation has fully converged to the target. More data needs to be observed. I am listening to opinions about interest rates as information. The decision will be made independently based on the opinions of the Monetary Policy Committee members.