Lee Chang-yong "Government Real Estate Measures Are Realistic and Bold... Can Restrict Price Increases" [Q&A]

Bank of Korea August Monetary Policy Meeting Press Conference
Conditions for Price Reduction Created, but Real Estate Prices Need Monitoring
Government Real Estate Measures... More Realistic and Bold Than Before

Lee Chang-yong, Governor of the Bank of Korea, on the 22nd addressed the "Yeongkkeuljok" who excessively borrow to buy houses, saying, "If you think real estate prices will rise rapidly like from 2018 to 2021, you need to consider two things." He added, "The current government's housing supply measures are realistic and bold," and "If the government's real estate supply policy is realized, it could constrain the continuous rise in real estate prices."

[Image source=Yonhap News]

At a press conference held immediately after the Bank of Korea's Monetary Policy Committee's 13th consecutive base rate freeze (at 3.50% per annum), Governor Lee said, "Looking only at inflation, conditions for a rate cut have been created, and it is difficult to see the economy as sluggish," adding, "Domestic demand can be addressed over time, but financial stability, including real estate prices, could become more risky if not addressed now, so it was judged appropriate to keep the rate unchanged in August."

Regarding domestic demand, he evaluated that recovery is slower than expected but consumption is not at a significantly poor level. Governor Lee said, "It is true that domestic demand recovery is slower than we thought, but financial stability must be considered," and "Consumption is influenced not by temporary changes but by overall income levels. Considering a potential growth rate of 2%, consumption is not at a significantly low level."

He added, "Among consumption, it is more accurate to recognize that self-employed people and vulnerable groups are in difficult situations rather than interpreting overall consumption as poor."

On the impact of a rate cut on domestic demand, he said, "Investment demand may be affected with a short lag, but consumption will be affected with a longer lag," and "The decline in consumption is largely due to structural factors related to population, so even if rates are lowered, consumption growth will be limited."

Below is a Q&A with Governor Lee.

- What is the background for the unanimous decision to keep rates unchanged?

▲I am confident that inflation will converge to the target level. I expect the convergence speed to the inflation target to accelerate over the next few months. Looking only at inflation, conditions for a rate cut have been created. It is difficult to see the economy as sluggish. This year's growth rate of 2.4% is higher than the potential growth rate of 2%. However, it is true that domestic demand growth is slow and differentiated. Therefore, keeping rates unchanged now is appropriate because domestic demand can be addressed over time, but financial stability, including real estate prices, could become more risky if not addressed now.

- You have lowered the economic growth forecast. Does this mean concerns about economic sluggishness have increased?

▲There are concerns that lowering the growth rate means the economy will worsen further. The reduction from 2.5% to 2.4% reflects the first quarter growth rate. The high growth rate in Q1 was influenced by temporary factors. This is a technical adjustment and does not mean the economy has worsened.

- What are the Monetary Policy Committee members' views on the possibility of a rate cut within the next three months?

▲Among the six members excluding myself, four said the possibility of a rate cut below 3.5% within three months should be kept open. The other two thought it appropriate to maintain 3.5% after three months. The four believe inflation will converge to the target and government real estate policies will be implemented, so they suggest keeping the possibility of a rate cut open while monitoring macroeconomic and financial stability conditions. The other two think it will take time to confirm the effects of government measures and that it is more stable to pay closer attention to financial stability over the next three months.

- Institutions like KDI emphasize the need for a rate cut due to concerns about sluggish domestic demand. Is a rate cut necessary when looking only at domestic demand?

▲KDI's forecast is more optimistic than the Bank of Korea's. Despite this, KDI's recommendation for a rate cut likely reflects their focus on domestic demand and economic growth. We consider both financial stability and price stability, so we understand the differing policy proposals.

It is true that domestic demand recovery is slower than we thought. However, financial stability must be considered. Current growth is 2.4%, while consumption growth is 1.8%. Although this difference seems large, consumption is influenced by 'permanent income,' reflecting overall income levels. Considering a potential growth rate of 2%, a 1.8% consumption forecast is relatively low but not significantly so. Among consumption, it is more accurate to recognize that self-employed and vulnerable groups are struggling rather than interpreting overall consumption as poor.

- Could the forward guidance on the 'possibility of a rate cut within three months' lead to changes in rate decisions without dissenting opinions?

▲In the past, without three-month forward guidance, dissenting opinions were communicated to the market to indicate possible rate changes. For August, all six members agreed on a freeze, though four kept the possibility of a rate cut open. This separates current and future decisions. Keeping the possibility open does not mean a cut will happen; it is conditional. We believe forward guidance can provide clearer signals, and this is being studied internally.

- The exchange rate has recently fallen significantly. Some say the Bank of Korea no longer needs to consider the exchange rate in rate decisions.

▲It is difficult to say we can be relaxed just because the exchange rate has fallen significantly in a few days. Due to overseas factors like Black Monday on the 5th, volatility can occur, so we remain cautious. If Jerome Powell's Jackson Hole speech, the early September employment report, and the FOMC decision provide clear direction, we may be able to focus more on domestic factors without being shaken by international factors.

- Despite strong exports, the domestic economy is deteriorating. Why is export strength not translating into domestic demand?

▲There are two reasons. First, the rapid export growth is mainly driven by semiconductors and IT exports. In the first half of this year, export growth was boosted by rising semiconductor prices. In the second half, we expect volume increases to have an effect. Second, last year, low semiconductor prices meant almost no bonuses, so wages did not rise much. With improved profitability of semiconductor exporters in the first half, we expect this to connect to domestic demand in the second half.

- Rate cuts typically take about a year to affect the economy. What impact would a rate cut have on domestic demand?

▲A rate cut could affect investment demand in the short term, but consumption would be affected with a longer lag. The decline in consumption is structural. Most employment growth is among the elderly, while employment among those in their 20s to 40s is decreasing due to population decline. Since consumption is higher among the 20s to 40s and the elderly tend to save more, structural factors related to population are largely responsible for the consumption decline. Therefore, even if rates are lowered, consumption growth will be limited. However, a rate cut would help vulnerable groups and self-employed people with high debt repayments.

- Market interest rates have recently fallen about 20 basis points, reflecting excessive expectations of a base rate cut. What causes this excessive movement?

▲The decline in 3-year and 10-year market yields seems excessive compared to the pace of base rate cuts. Such phenomena occurred at the time of rate cuts, but the severity is notable even compared to the past, and all Monetary Policy Committee members agree on this.

Internationally and domestically, expectations of rate cuts are a factor. Also, supply and demand factors play a role. About two-thirds of this year's long-term government bonds were issued in the first half, so issuance volume will decrease in the second half, likely pushing prices up. Overseas investors anticipate inclusion in indices due to improvements in foreign exchange market structuring between September and the end of next year, leading to increased demand and futures market investment flows, which may be lowering prices.

- Some countries like Australia show independent trends from the US. Is South Korea too synchronized with the US?

▲We have to accept this now. The Korean market follows the US more than before, with stock markets also synchronized, which is part of market maturation. This trend is expected to continue for some time. In the foreign exchange market, in the first half, domestic investors' overseas investments were twice the size of foreign investors' domestic investments. The market structure is shifting to be influenced more by 'Seohak Gaemi' (Korean retail investors investing abroad) than foreign investors, so synchronization with overseas variables is expected to deepen.

- There is criticism that Monetary Policy Committee members hide behind anonymous 'three-month rate cut possibility' forward guidance instead of revealing their names.

▲Personally, I think anonymity is better. Revealing names when expressing opinions on the three-month rate cut possibility risks criticism for wrong predictions, making future adjustments difficult. Also, it is hard to deny that numbers released under the governor's name might be treated differently from other members. Even with dot plots, anonymity is preferable, and if necessary, members can communicate individually with the media. Revealing names can cause more side effects.

- Since last year, you warned the Yeongkkeuljok not to expect low rates and to reconsider the real estate invincibility myth. Is that warning still valid?

▲Real estate prices are rising, so we are trying to stop it quickly. Yeongkkeuljok investing their own money in rising real estate prices bear their own responsibility. However, if they expect rapid price increases like 2018-2021, they should consider two things. First, unlike the past, the government recognizes the seriousness of real estate issues and has announced supply measures. This government's real estate policy is realistic and bold. We hope the government's supply policy is realized, which could constrain continuous price increases.

Second is the strengthening of the Debt Service Ratio (DSR) regulation. DSR regulation is necessary for financial market stability regardless of real estate price increases. The possibility of stronger DSR has increased, and financial authorities have explicitly stated that if current demand measures are insufficient, additional demand measures will be taken to ensure financial stability. The current Monetary Policy Committee members agree that the Bank of Korea will not stimulate real estate price increases by excessively supplying liquidity.

- Would a rate cut lead to real estate price increases?

▲Any decision can be rationalized or criticized. We consider that other factors may respond with a lag, but financial stability factors like real estate prices are the most urgent. Therefore, we decided to keep rates unchanged. Real estate prices cannot be managed by the Bank of Korea alone. It is important to coordinate policies with the government and share roles, with the government implementing macroprudential policies.

- Although the rate freeze was unanimous, four out of six members kept the possibility of a rate cut within three months open, raising expectations for an October rate cut. Is this an excessive reaction?

▲Interpretations vary depending on perspectives. It is natural for many institutions to evaluate us differently. Seeing an October rate cut as certain is an interpretation. The three-month rate cut possibility includes both October and November. We will review upcoming indicators and decide on rates in October.