Financial Market Issues Review and Communication Meeting Held
Judgment on Full-Scale Shift in Global Monetary Policy
Possibility of Temporary Market Volatility Exists
Kim So-Young "Efforts for Market Stability and Strengthening Macroprudential Management"
Warning of Excess Supply in Liquidity, Leverage, and Real Estate Market... "Preventing Financial Imbalance and Promoting Institutional Improvements"
The Financial Services Commission (FSC) will continue efforts to stabilize the market and strengthen macroprudential management, as global monetary policy changes following the U.S. Federal Reserve's (Fed) interest rate cuts may lead to increased liquidity and expanded leverage (borrowing). Additionally, since efficient capital allocation is crucial during interest rate cuts, the FSC plans to prevent the side effects of excessive liquidity supply to the real estate sector by promoting improvements in real estate project financing (PF) and the comprehensive financial investment business system.
On the 24th, the FSC held a review and communication meeting on global monetary policy changes in financial markets, chaired by Vice Chairman Kim So-young. The meeting involved related agencies and market experts discussing the economic and financial market situation after the global monetary policy shift and future policy directions. The European Central Bank (ECB) implemented its second interest rate cut in July on the 12th, and last week, the U.S. Fed cut its benchmark interest rate by 50 basis points (1bp=0.01%) (from 5.25~5.50% to 4.75~5.00%), marking the full-scale transition from the global monetary tightening stance that had lasted over two years.
Participants first evaluated that the Fed's rate cut symbolically showed that major countries' monetary policies, which had focused on fighting inflation until now, have reached a point where they must move toward new goals such as economic recovery, employment expansion, and economic growth. While the shift from monetary tightening can be seen as a positive factor for short-term financial market stability, since expectations of rate cuts are already significantly reflected in the financial markets and risks of economic slowdown in major countries remain, future market conditions are expected to be greatly influenced by real economic trends such as the possibility of a soft landing in each country’s economy.
They particularly warned that unexpected changes in global capital flows could cause sudden market fluctuations temporarily. Participants advised that if the interest rate differential between the U.S. and Japan narrows, the risk of a repeat of the "yen carry trade unwinding" issue?which was one of the main causes of market volatility in early August?cannot be ruled out, and stressed the need to closely monitor market conditions to respond to such risks.
In response, Vice Chairman Kim said, "While interest rate cuts help economic recovery, consumption activation, and investment expansion, they may also increase the burden of more firmly managing the financial stability foundation," emphasizing that "future policy responses are important for sustained and stable economic growth."
The FSC plans to continue market stabilization efforts amid various uncertainties that could affect financial markets, such as the pace of interest rate cuts, whether the economy achieves a soft landing, the outcome of the U.S. presidential election, and developments in Middle East conflicts. Vice Chairman Kim stated, "As financial markets adapt to the new monetary policy environment, volatility can expand at any time depending on how market expectations and concerns act," and pledged to maintain a policy response system for financial market stability with vigilance.
Furthermore, as liquidity expansion may increase leverage across the economy, raising concerns for financial stability, the FSC plans to review various policy alternatives to create stable financial conditions from a macro perspective. The government has been strengthening management of four major risks: household debt, real estate PF, loans to self-employed individuals, and the soundness of the secondary financial sector, while implementing household debt management policies centered on the debt service ratio (DSR).
Vice Chairman Kim said, "The government recognizes macroprudential management as a very important task and will continue to review various measures to strengthen soundness management," adding, "Regarding the recently contentious household debt issue, we will analyze the loan growth status in September and the autonomous management performance of each bank, and if additional measures are needed, we will prepare them promptly."
He also mentioned that the recent trend of interest rate cuts does not necessarily mean a return to the past low-interest-rate era, stating, "Given the likelihood that the global economy will remain in a high-interest-rate, high-inflation era due to demographic changes, transition to a low-carbon economy, and increased fiscal spending by countries, all economic agents should be vigilant about debt issues and respond more proactively."
Additionally, the FSC announced plans to curb excessive liquidity supply to the real estate sector during the interest rate cut phase to prevent worsening financial imbalances. Enhancing economic vitality through investment expansion and consumption activation is an important goal, and to this end, improving the efficiency of capital allocation during interest rate cuts to ensure timely investment in productive sectors is considered even more crucial.
Vice Chairman Kim stated, "We must be cautious about liquidity increases from interest rate cuts being excessively supplied to the real estate sector, leading to increased debt and asset price rises," adding, "To prevent the worsening of financial imbalances, we will promote improvements in real estate PF and the comprehensive financial investment business system to suppress excessive capital inflows and prevent excessive accumulation of real estate-related leverage."
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