[Q&A] Lee Changyong: "Selective Support Is More Efficient for Helping the Self-Employed from a Fiscal Perspective"

Lee Changyong, Bank of Korea Governor, Explains Inflation
"Even a 20 Trillion Won Supplementary Budget Will Have Limited Impact on Inflation"
"Need to Properly Manage Expectations for Metropolitan Area Housing Prices"
"Interest Rate Cuts Should Not Fuel Expectations... A Concrete Supply Plan for the Metropolitan Area Is Needed"

Lee Changyong, Governor of the Bank of Korea, stated on the 18th regarding the universal support payment for all citizens included in the supplementary budget bill, "From the perspective of fiscal efficiency, selective support would be more effective in helping self-employed individuals and small business owners."

Lee Changyong, Governor of the Bank of Korea, is speaking at the briefing session to review the operation status of the price stability target held at the Bank of Korea in Jung-gu, Seoul, on the afternoon of the 18th. Provided by the Bank of Korea.

At the press briefing on the "Status of Inflation Targeting Operation" held at the Bank of Korea headquarters in Jung-gu, Seoul, on this day, Governor Lee responded to a question about the potential impact of the universal support payment on inflation, saying, "Given the difficult economic situation, the supplementary budget will make a significant contribution to growth," but he also expressed his view on the method as described above.

The Bank of Korea estimated that if the second supplementary budget is executed at around 20 trillion won, it would raise next year's inflation rate by 0.1 percentage point. Kim Woong, Deputy Governor, said, "The impact on this year's inflation will be limited since the execution may be delayed," and "Although it depends on the composition of the budget, we expect next year's inflation to increase by 0.1 percentage point." This means it is not at a level that would stimulate inflation.

Regarding the rise in housing prices in the Seoul metropolitan area, which is driving up perceived inflation such as housing costs, Governor Lee said, "We have entered a trend of interest rate cuts, and I believe it is due to expectations that supply will be insufficient for several years," emphasizing, "It is important to manage these expectations well from the beginning." He added, "A concrete supply plan for the metropolitan area needs to be presented, and the Bank of Korea should not make the mistake of excessively amplifying expectations," and "Fundamentally, we need to consider how to reduce the incentives that draw young people to the metropolitan area."

The following is a Q&A session.

On the afternoon of the 18th, a briefing session on the status of inflation targeting operation was held at the Bank of Korea in Jung-gu, Seoul. (From left) Lee Changyong, Governor of the Bank of Korea; Kim Woong, Deputy Governor; Lee Jiho, Director of the Research Department. Provided by the Bank of Korea.

-Although the government's real estate measures have not yet been finalized, given the significant impact on perceived inflation such as housing costs, please provide policy advice.

▲The reality we face is that housing prices in provincial areas are falling due to oversupply, while the metropolitan area is overcrowded. I believe the rise in metropolitan area prices is due to expectations?such as the trend of interest rate cuts and the belief that supply will be insufficient for several years. It is important to manage these expectations well from the outset. To do so, a concrete supply plan for the metropolitan area is necessary. The Bank of Korea will decide interest rates based on economic conditions, but we must not make the mistake of excessively amplifying expectations. Fundamentally, we need to consider how to reduce the incentives that attract young people to the metropolitan area. That is why we have announced structural reform policies such as developing hub cities. Both short- and long-term measures must be implemented together.

-There seem to be growing concerns about the prices of processed foods and other daily necessities. Alternatives such as quota tariffs and diversification of imported raw materials have been mentioned. What is the Bank of Korea's stance on artificial price controls?

▲The Bank of Korea manages the overall price level, while the Ministry of Economy and Finance and other price control authorities monitor specific items or periods when supply increases or certain item prices rise. I do not think it is appropriate to call these measures price controls. When the price of a specific item rises, it is natural to identify the cause and respond. According to today's analysis by the Bank of Korea, 50% of the increase in processed food prices is due to supply factors, while the rest is attributed to profit margins or other factors. For items that have seen significant price increases recently, such as eggs, it is natural to closely examine the reasons, consult with producers, and manage the situation. In this sense, I do not think we are at a stage where the term 'price control' is appropriate.

-The size of the second supplementary budget has been set at around 20 trillion won through consultation between the ruling party and the government. It will include differentiated support, with the main focus on all citizens but also targeting vulnerable groups such as basic livelihood recipients. Considering the size and content of the supplementary budget, how do you assess its impact on inflation and economic recovery?

▲I have not seen the detailed plan yet. The multiplier effect varies depending on how the funds are used, so I will be able to comment after reviewing the details at the July monetary policy meeting.

▲Kim Woong, Deputy Governor / Even if the supplementary budget is around 20 trillion won, the impact on this year's inflation will be limited due to possible delays in execution. Although it depends on the composition, we expect next year's inflation to rise by about 0.1 percentage point. As for growth, we need to know the details to make an assessment.

-The livelihood recovery support payment included in the supplementary budget is being narrowed down to universal support for all citizens. Some say this could stimulate inflation, while others believe the impact will be minimal. What is your opinion?

▲It is difficult to evaluate since I have not seen the details. Given the poor economic situation, I have long said that the supplementary budget will make a significant contribution to growth, and that the impact on inflation will remain at the previously mentioned level. I have also said that selective support is more efficient from a fiscal perspective than universal support, but that was not because of inflation concerns.

-When input prices rise, they are passed on to consumer prices, but when they fall, companies tend not to lower prices. While labor costs and other price factors must be considered, do you think corporate greed is currently aggravating consumer prices?

▲It depends on how you interpret the data. For example, if the government suppressed price increases to stabilize inflation when costs rose, prices may not fall as much when costs decrease. If you factor in the price increases that were not previously implemented, it could be interpreted that way. However, statistically, when costs rise, prices tend to rise over a long period, and when there are downward shocks, it is difficult to observe a trend of prices falling together. How this should be interpreted requires a balanced view that considers the country's policy history.

-One of the main factors for expecting inflation to stabilize seems to be low demand pressure. How do you currently assess the recovery of private consumption?

▲Kim Woong, Deputy Governor / In our economic outlook in May, we projected private consumption growth at 1.1% for this year. We said it would rebound after bottoming out in the first quarter, and upon reviewing data released since mid-May, we have seen some recovery in sentiment, and actual credit card data shows consumption is occurring. In the second half, with the supplementary budget and an ongoing trend of interest rate cuts, we expect the effects to gradually improve consumption. However, demographic and structural factors are affecting the recovery of private consumption, so the pace of recovery will likely not be rapid.

-Do you think concerns about rising housing prices could affect the timing or scale of interest rate cuts at the July monetary policy meeting?

▲As I said at the last policy meeting, we are in a phase of interest rate cuts. However, the timing and extent of the cuts will be determined by monitoring household debt, the housing market, and the foreign exchange market.

-Although the government's real estate measures have not yet been finalized, given the significant impact on perceived inflation such as housing costs, please provide policy advice.

▲The reality we face is that housing prices in provincial areas are falling due to oversupply, while the metropolitan area is overcrowded. I believe the rise in metropolitan area prices is due to expectations?such as the trend of interest rate cuts and the belief that supply will be insufficient for several years. It is important to manage these expectations well from the outset. To do so, a concrete supply plan for the metropolitan area is necessary. The Bank of Korea will decide interest rates based on economic conditions, but we must not make the mistake of excessively amplifying expectations. Fundamentally, we need to consider how to reduce the incentives that attract young people to the metropolitan area. That is why we have announced structural reform policies such as developing hub cities. Both short- and long-term measures must be implemented together.

-Until April, the Bank of Korea and financial authorities were promoting shared-equity mortgages, but there are now reports that they were excluded due to concerns about fueling housing prices. Given the impact on metropolitan area congestion and inflation, do you still see a need for shared-equity mortgages in the long term?

▲There is a misunderstanding about the policy. The shared-equity mortgage, as commonly advocated by the financial supervisory authorities and the Bank of Korea, is about shifting from purchasing homes entirely with debt to a shared-equity model. Whether demand or lending increases depends on how the policy is implemented. Concerns about a significant supply-driven rise in housing prices should be considered only after such new financial products have been in place for some time. For now, the primary goal should be to establish the perception that there is an alternative to buying a house solely through loans by creating successful cases.

-If the issuance of won-denominated stablecoins is allowed, there are projections that it could increase the money supply and stimulate inflation. Some say this could make inflation management by the central bank more difficult. What is your view from an inflation perspective?

▲Depending on the form in which reserve assets are held, there may be no change in the money supply, and the impact could differ. Our position is clear. First, the Bank of Korea acknowledges the need for won-denominated stablecoins and does not oppose their issuance. However, we need to assess whether issuance will not reduce the use of dollar-denominated stablecoins, but instead make exchanges easier and increase demand for dollar stablecoins, potentially complicating foreign exchange management. Also, as payment and settlement services currently allowed only for banks move to the non-bank sector, we need to consider the broader impact on bank profitability and the structure of the banking industry. Once the relevant ministries, such as the Ministry of Economy and Finance and the Financial Services Commission, have established their positions, we will coordinate and accept policies regarding won-denominated stablecoins.