Shin Seong-hwan, Monetary Policy Committee Member, "Difficult to Wait Until Housing Price Slowdown Becomes Certain" [Q&A]

Press Conference at the Bank of Korea Annex on the 25th

Shin Sung-hwan, a member of the Monetary Policy Committee at the Bank of Korea, said on the 25th, "I do not think our country's situation is relaxed enough to lower interest rates until the slowdown in house price increases becomes certain."

At a press conference held at the Bank of Korea annex conference hall in Jung-gu, Seoul, Shin said, "When considering whether we have the luxury to wait until the momentum of house price increases definitely slows down, the answer is no," adding, "We will comprehensively judge the necessity of lowering interest rates after seeing some degree of slowdown; it is not that we will lower interest rates only after house prices are 100% stabilized."

Regarding the recent big cut (0.5 percentage point interest rate cut) by the U.S. Federal Reserve (Fed), he explained, "The U.S. made a big cut as a fairly preemptive move," and "We could not take preemptive measures because the risks were significantly highlighted."

In response to criticism that the Bank of Korea might be making a lagging rate cut, he said, "From the perspective of domestic demand, I agree that it might be lagging," but added, "However, if interest rates were lowered based solely on domestic demand while risk factors are highlighted, there is a possibility that the risks could spread uncontrollably."

The following is a Q&A with Committee Member Shin.

- In Seoul, especially in the Gangnam 3 districts and Mayongseong (Mapo, Yongsan, Seongdong districts) areas, many people who are less affected by interest rates are buying houses. Does this mean there is a limit to controlling the rise in house prices through interest rates?

▲ If the rise in house prices was limited to the Gangnam 3 districts and Mayongseong, we would not be concerned. The problem is that it is spreading throughout the metropolitan area, which is why we are worried. One of the most important factors in house prices is 'consumption.' When income increases, the capacity to spend on housing increases. The problem is that house prices are rising faster than income. To control house prices with interest rates, rates would have to be raised considerably. Raising interest rates affects house prices, and if raised significantly, house prices can definitely be controlled. However, the intention is not to control house prices with interest rates. If interest rates are lowered in a situation with strong momentum, it could further strengthen that momentum, so we intend to hold. If the goal was to control house prices, interest rate hikes would not stop at 0.25 percentage points.

- Due to sluggish domestic demand, the Presidential Office and the Korea Development Institute (KDI) are talking about lowering interest rates. Recently, banks have been tightening loans and raising interest rates. Isn't the Bank of Korea's interest rate policy out of sync?

▲ I do not think macroprudential policy and interest rate policy must always move in the same direction. Macroprudential policy is about the supply side of money, while interest rates affect the voluntary demand of consumers. Interest rate policy should lower rates to stimulate domestic demand. Personally, I think it is not a good policy for supervisory authorities to intervene in price variables.

▲ It is possible for outsiders to talk about interest rates as much as they want. However, from the Bank of Korea's standpoint, I recommend holding this basic perspective: The government basically likes to step on the accelerator and rarely applies the brakes. Therefore, someone must apply the brakes when necessary. I believe that entity is the central bank. That is why central bank independence is important. If the central bank also steps on the accelerator, control becomes impossible. I understand the government's mention of lowering interest rates. But from the Bank of Korea's perspective, 'As the risk manager of the Korean economy, we must control risks, so it is premature to shift to the accelerator.' I do not know how long this situation will last, but if the weakening of risk factors becomes visible, we will likely move in the same direction.

- Is the opinion that interest rates should not be lowered until a clear change in the momentum of rising real estate prices and household debt is observed?

▲ The Bank of Korea plays the role of risk manager, but it is not only about risk management. We try to balance the accelerator and brake as much as possible. I am not sure if the Korean economy is relaxed enough to wait until a clear slowdown in momentum is observed. When making monetary policy decisions, we consider risks but also the necessity of lowering interest rates. Currently, I believe risk factors are more prominently highlighted than the need for rate cuts. If risk is 100, do we have the luxury to wait until it drops to 5 before making a decision? I think not. Ultimately, we must judge based on data.

- Does this mean you believe interest rates should be lowered within the year even if the momentum of house price increases is not clearly controlled?

▲ When considering whether we have the luxury to wait until the slowdown is certain, I think we do not. We will comprehensively judge the necessity of lowering interest rates after seeing some degree of slowdown; it is not that we will lower rates only after house prices are 100% stabilized. I do not think our country's situation is that relaxed. From the domestic demand perspective, I think there is a need for rate cuts.

- There is a possibility that the correlation between interest rate cuts and domestic demand could be negative.

▲ I do not think so. Lowering interest rates will improve domestic demand. However, there may be differing opinions on how much it will improve. Lowering rates means paying less interest and having more money to spend, which is effective. Over time, this effect will grow. Interest rate cuts will definitely help domestic demand.

- The U.S. Federal Reserve recently made a big cut (0.5 percentage point rate cut). How do you think this will affect the Bank of Korea's rate decision at the next Monetary Policy Committee meeting?

▲ The situations in Korea and the U.S. are different. Personally, I thought it would be okay to lower rates around July. The U.S. was in a similar situation to us, with concerns about inflation largely diminishing when looking at the relationship between employment and inflation. Our inflation worries were less than the U.S., and the employment market was not that bad. Nevertheless, I judge that the U.S. made a fairly preemptive move with the big cut. We could not take preemptive measures because risks were significantly highlighted.

- There are talks that the Bank of Korea's rate cuts are lagging due to delayed timing.

▲ From the domestic demand perspective, I agree it might be lagging. However, if interest rates were lowered based solely on domestic demand while risk factors are highlighted, there is a possibility that risks could spread uncontrollably. Looking back, I think the decision was unavoidable.

- Recently, Governor Lee Chang-yong said in a National Assembly lecture that policy finance is the cause of the surge in household loans and house prices. Is policy finance the cause of the surge in loans and house prices?

▲ I think you are asking if policy finance is the main cause of rising house prices. In terms of scale, it is not the main cause, but it was certainly one of the factors. Regarding whether policy finance should be reduced, since housing is an important asset, if the government has the capacity, it should help people buy houses. However, it is important that policy finance is provided within the borrower's repayment capacity. Lending money to those without repayment ability is, in extreme terms, predatory lending. If policy loans are provided without increasing repayment burdens, there are other policy alternatives, such as linking pensions and home purchases like Singapore funds. I believe the principle of lending within repayment capacity must be upheld.

- You described yourself as a 'dovish' (favoring easing) member. Recently, the market says you have turned 'hawkish' (favoring tightening). What do you think?

▲ I tend to be more sensitive to micro-level issues. Regarding housing prices, the problems that rising housing prices can cause are so significant that when we consider the risks we bear, and whether we can stop them once they start to materialize, I think we cannot. I do not think my stance has changed from dovish to hawkish. Looking at things microscopically means I place relatively more importance on financial stability issues. Personally, because it has become a factor that can greatly undermine financial stability, I maintain that position.

- Do you think specialized policies targeting house prices are necessary at this point?

▲ Are additional policies related to housing necessary? Macroprudential policy is about reducing the amount of water coming from the faucet with force. It is appropriate to reduce the water a little, then continue to reduce it a bit more, and if the situation does not improve, reduce it further. It is not desirable to reduce it all at once. We must proceed while monitoring the situation.

- Many view the September household loan figures as noisy. Some say the household loan situation should be judged as an auxiliary indicator ahead of the October Monetary Policy Committee meeting. What is your view?

▲ We recognize that there may be noise in the September data. We are also considering whether we can make judgments based on September data. Even so, we have no choice but to consider various special factors and make judgments based on data from September to early October. It is difficult to look at formal auxiliary indicators.

- Since no minority opinions were expressed at the last Monetary Policy Committee meeting, some argue that minority opinions are useless. What do you think?

▲ There is a misunderstanding. We do not set strategies as a whole committee and move accordingly. Minority opinions come out when they do, and do not when they do not. The seven MPC members each express opinions based on their own judgment. Minority opinions may or may not appear. There is no need to place great significance on minority opinions.

- Recently, apartment sale price growth rates have declined since September. September includes holidays, which reduce demand for buying houses. Can we consider this data as indicating a decline?

▲ The data is coming out in a way that reduces personal concerns, but I worry whether we can trust it, whether it will appear as a trend, and what happens if prices rise again in October or November. Therefore, I do not know what decision will be made in October. I am also very frustrated. I wish someone would teach me. What we can see are data up to that point and government situations. We must judge by looking at underlying market stories and so on.