[Q&A] Lee Chang-yong: "Entered the tunnel called US tariffs... Downgrade of May growth forecast inevitable"

April Monetary Policy Committee Press Briefing
Lee Chang-yong: "Base Rate Unchanged, Only Shin Sung-hwan Dissented"
All Monetary Policy Committee Members: "Possibility of Additional Cut Within Three Months Should Remain Open"
"12 Trillion Won Extra Budget Would Raise Growth Rate by 0.1 Percentage Points"

Lee Chang-yong, Governor of the Bank of Korea, said on the 17th, "To use a metaphor, it feels like suddenly entering a dark tunnel due to the United States' tariff policy," adding, "Considering the sluggish growth in the first quarter, the May growth rate is bound to fall short of the February growth forecast of 1.5%."

Lee Chang-yong, Governor of the Bank of Korea, is speaking at the Monetary Policy Direction press conference held at the Bank of Korea in Jung-gu, Seoul on the 17th. Photo by Joint Press Corps. Yonhap News Agency

At a press conference held after the decision to keep the base interest rate unchanged that day, Governor Lee stated, "The biggest change in policy conditions since the February monetary policy meeting is that trade conditions have significantly deteriorated, and the uncertainty about future developments has increased to an unprecedented level," adding, "At present, the uncertainty of the future growth path is so great that it is difficult even to set a basic scenario for the forecast."

The uncertainty in growth forecasts was the main reason the Bank of Korea's Monetary Policy Committee decided to keep the base rate unchanged in April. Governor Lee further explained, "Given the high volatility of the exchange rate and the need to closely monitor household loan trends, it was deemed appropriate to maintain the current base rate level while reviewing changes in domestic and external conditions." Only Monetary Policy Committee member Shin Sung-hwan expressed a dissenting opinion in this decision.

While keeping the base rate unchanged, Governor Lee delivered a dovish (monetary easing signal) message. He hinted at a significant downward revision of the growth forecast in the May economic outlook, stating, "Even the pessimistic scenario growth rate of 1.4% presented at that time might be too optimistic." Regarding additional rate cuts, he left room for possibility by saying, "Whether it is possible to lower it further than the maximum two rate cuts announced in February will be reviewed in the May outlook."

All six Monetary Policy Committee members agreed in their forward guidance on interest rate forecasts for the next three months that there is a need to lower the rate from the current level of 2.75%.

Below is a Q&A with Governor Lee.

- Please tell us about the dissenting opinion in the April Monetary Policy Committee meeting.

▲ In this Monetary Policy Committee meeting, member Shin Sung-hwan expressed a dissenting opinion. He believed that considering inflation and growth alone, a significant rate cut was necessary. However, concerns about household debt and the exchange rate were also valid, so he decided that it would be desirable to cut the rate by 0.25 percentage points this time to appropriately respond to the economic slowdown. The majority opinion of the other five members was that while a rate cut was needed considering growth and inflation, since the monetary policy was already on a lowering trend and considering various policy uncertainties, financial stability, and concerns about capital outflows, it was better to keep the rate unchanged for the time being and observe. To use a metaphor, it feels like suddenly entering a dark tunnel, so in a dark situation, it is better to adjust speed and wait for it to get brighter.

- Does the "significant cut" mentioned by member Shin Sung-hwan imply that once concerns about the exchange rate or financial situation subside, a big cut (0.5 percentage point rate cut) might be possible considering the current growth trend?

▲ It can be interpreted that way. Considering the downward speed of the economy in the first quarter and the tariff impact, the May economic growth forecast could worsen more than expected. If concerns about real estate or the exchange rate disappear, it means that if we are going to move anyway, it might be necessary to move at a faster pace, hence the term "significant cut."

- What is the forward guidance on interest rate forecasts for the next three months by the Monetary Policy Committee members?

▲ All six members except me said that the possibility of a cut below the current 2.75% level should be kept open. Given the current economic outlook, there is a high possibility that the May growth forecast will be lowered, so it was the opinion that it would be better to keep the possibility of a rate cut open to respond appropriately while monitoring the revised forecast and other financial and foreign exchange market conditions.

- Please explain specifically how much the economic growth forecast in May will fall short compared to February's 1.5% forecast.

▲ Even considering the U.S. administration's mutual tariff suspension, looking at the tariff rates on China, item-specific tariffs, and the 10% basic tariff, I think the February forecast scenario was somewhat optimistic. The May forecast will likely take a greater impact into account. However, since the downward adjustment range has not yet been determined, it is difficult to speak specifically. Tariff policy changes are severe, and negotiations remain.

▲ I also expect the International Monetary Fund (IMF) forecast next week to be significantly lowered. This is not just a problem for our country but globally, growth rates are expected to decline sharply. Especially, even without considering the global trade contraction effect, there is a considerable possibility of a downward revision in the first quarter. Political uncertainty lasted longer than expected, and there were wildfires. Adding the tariff effect to this base effect, this year’s growth rate is likely to be considerably reduced.

- You mentioned in February that the total number of base rate cuts this year would be 2 to 3 times. Considering the growth trend, is there a possibility of an increase?

▲ The final interest rate level and the pace this year depend on economic conditions. When the May growth forecast is finalized, there may be discussions on whether to change the existing view.

- Even if the Bank of Korea wants to increase the number of rate cuts this year, wouldn't it be limited if the U.S. Federal Reserve (Fed) delays?

▲ The Fed's rate cut pace will likely be determined by the economy and inflation. However, there is no mechanical requirement to maintain a certain interest rate differential with the U.S. Since 2023, there has been some decoupling (weakening correlation). Of course, the exchange rate impact due to the Korea-U.S. interest rate differential is also considered, so if the U.S. rate cut is delayed, it will somewhat affect Korea's ability to lower rates. But when deciding rates, we look at Korea's economic situation and do not act mechanically.

- The Bank of Korea said that an additional budget of 15 to 20 trillion won is needed, but currently, 12 trillion won is being discussed. Do you see a need for additional fiscal policy?

▲ As the central bank governor in the first quarter, I mentioned the possibility and scale of an additional budget exceptionally to prevent overseas institutions' growth forecasts from becoming too pessimistic in a situation where the economy worsened after the emergency decree and no stimulus measures were announced. That situation has now passed, so it is not appropriate for the governor to mention the scale. However, I generally say that additional budgets should be limited to temporary expenditures so as not to structurally lead to fiscal deficits.

▲ Usually, when the government announces fiscal policy, the central bank estimates growth accordingly and considers monetary policy responses. Please do not expect me to say how much additional budget would be good in May.

▲ Lastly, I want to say that when the economy worsens, it is difficult to rely solely on monetary policy or solely on fiscal policy. Both sides need to cooperate to some extent. And when the growth forecast is lowered, I think stimulus measures should be used to raise economic growth again, but I hope there will be reasonable expectations about the extent. If you think that the entire drop in the growth forecast should be raised through stimulus measures, it might be okay for about a year, but afterward, you will experience huge side effects. Even if stimulus is needed, a slight increase is stimulus; trying to raise it all will cause side effects.

- How do you estimate the impact of the 12 trillion won additional budget on Korea's economic growth rate?

▲ The Bank of Korea estimates that a 12 trillion won additional budget would have about a 0.1 percentage point economic recovery effect. A report (by Professor Heo Jun-young's team at Sogang University Department of Economics) that predicted a 0.5 percentage point increase in economic growth with a 10 trillion won additional budget is unrelated to the Bank of Korea's view. Rather, we think the number is too high.

- There are concerns that the delay in the timing of the additional budget compared to the original expectation may reduce the growth rate improvement effect despite spending the same amount of money.

▲ When we estimated a 0.2 percentage point growth rate increase with a 15 to 20 trillion won additional budget last time, we assumed implementation after the second quarter. There is no difference from our expected timing. However, since the amount has been reduced by about half compared to last time, we said the growth rate improvement effect would be 0.1 percentage points.

- The exchange rate has decreased but is still in the 1,400 won range. Volatility is also high due to uncertainty. What do you think is needed for volatility to decrease?

▲ There are three main factors that could reduce volatility. First, it depends on the U.S. administration's tariff policy, which includes acceptance and retaliation by not only the U.S. and China but also other countries. Second, how tariff policy affects U.S. inflation and growth, and thus monetary policy, which will also impact the dollar index. Third, domestic political uncertainty still has an influence. How quickly that is resolved will likely reduce volatility.

- The dollar index has fallen below 100, but while the yuan and yen are appreciating rapidly, the won is slower.

▲ When the dollar index appreciates, Korea's exchange rate depreciates more or similarly, but recently, the depreciation speed has been slower, which we are closely monitoring. First, when depreciation was significant, domestic political instability also influenced the exchange rate, which rose from the low 1,400 won range to 1,460-1,470 won after the emergency decree announcement, and political instability prevented it from falling much. Now, in the appreciation phase, Korea is more connected with China in trade and exports than other countries, so it is a country heavily affected by the U.S. administration's tariff policy. Also, political stability has not fully returned to its original state, so the depreciation is less. According to economic models, the current level is somewhat more depreciated than fundamentals. We believe there is room for further depreciation if the Trump administration's tariff policy and political situation stabilize.

- Since all six Monetary Policy Committee members except you have kept the possibility of a rate cut within three months open, it seems likely there will be a cut in May. Since it is just before the presidential election, wouldn't it be better to give a clear signal now to reduce unnecessary misunderstandings if there is a consensus?

▲ The Bank of Korea tries to decide based only on economic data without considering politics. We can be politically freer than the elected government and believe we must perform that duty. We will try to be as neutral as possible so as not to appear political. Since the Monetary Policy Committee meeting is held one week before the election, many people will interpret it politically. We cannot control that. Some say it would be more comfortable to say it in advance, but saying it in advance can also be politically interpreted, and we do not know what might happen in the remaining month. The Monetary Policy Committee and the Bank of Korea will judge based only on economic data and strive to decide politically neutrally without considering politics.