[Editorial Note] "Bank of Korea Considering Quantitative Easing?" Time to Look Beyond the Incident and Seek Alternatives

Bank of Korea's Quantitative Easing Review Rumor: A Misunderstanding
Amid Long-Term Trends of Low Birth Rate and Aging Population, and Declining Potential Growth Rate
A Chance to Develop Concrete Alternatives for Effective Monetary Policy Operations

"Is the Bank of Korea really considering quantitative easing (QE)?" Recently, an unexpected rumor spread that the Bank of Korea was reviewing quantitative easing as part of a new monetary policy. This caused a stir in the market, with government bond yields in Seoul's bond market hitting their lowest point of the year. Although the Bank of Korea immediately denied the rumor, stating it was completely unfounded and the situation was temporarily resolved, the issue is too significant to be dismissed as a mere incident.

Lee Changyong, 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 of last month. Photo by Joint Press Corps, Yonhap News Agency

This is how it all began. The misunderstanding started on April 30, when Lee Changyong, Governor of the Bank of Korea, stated in his welcoming remarks at a policy symposium co-hosted by the Bank of Korea and the Korean Economic Association, "It is time to consider whether we should introduce balance sheet expansion policies such as quantitative easing, as advanced economies have done, and whether it would be desirable to do so." In the overall context, his remarks were intended to mean that it is time to begin considering long-term changes, including whether quantitative easing is possible, and if not, what alternatives might be sought.

One of the central roles of a central bank is to guide and manage market interest rates around the policy rate it sets. The overall framework for this is called the monetary policy operational system. Since this symposium addressed structural reforms of the monetary policy operational system, Governor Lee used his welcoming remarks to discuss changes in the monetary policy operations of major economies after the global financial crisis, Korea's approach of overcoming crises through only supplementary measures without fundamental changes, and the inherent limitations in this approach.

Ultimately, the idea that the Bank of Korea should proactively consider what to do if policy rates reach zero and monetary policy operations hit their limits?just as in some advanced economies?spread into the misconception that the Bank of Korea is currently reviewing the introduction of quantitative easing. At a press conference in Milan, Italy, on May 5, Governor Lee expressed his confusion, stating that he did not understand why a discussion about long-term concerns was suddenly being linked to current monetary policy. The Bank of Korea also reiterated its position on its official blog the previous day, stating, "If the Bank of Korea were to rapidly expand its balance sheet and supply a large amount of base money (i.e., engage in quantitative easing), Korea, as a non-reserve currency country, could face a depreciation of its currency, increased volatility in the foreign exchange market, and greater capital outflows," once again seeking to dispel the misunderstanding.

If this incident simply ends with "So, the Bank of Korea isn't doing quantitative easing," it would be nothing more than an unproductive cycle of misunderstanding and clarification. However, as the issue has been repeatedly discussed, it has ultimately provided more opportunities to focus on the underlying substance behind the incident. The Bank of Korea's monetary policy and open market operations will inevitably be heavily influenced by long-term economic and social structural changes. In the current situation, where low birth rates and an aging population are unavoidable, a structural decline in the potential growth rate will change the effectiveness of the existing monetary policy operational system compared to the past, making change inevitable. At the symposium, there was consensus that policies such as quantitative easing, as implemented in major economies, are unlikely to be suitable alternatives for Korea's circumstances. Rather than scrambling to fix the barn after the horse has bolted once policy options are exhausted, it is hoped that this incident will serve as a catalyst for more concrete consideration of alternatives.