[Q&A] Lee Changyong: "Housing Prices Must Be Controlled... We Will Not Stimulate Them With Base Rate"

July Monetary Policy Committee Press Conference
Lee Changyong: "Unanimous Decision to Hold Base Rate"
Four Out of Six Members See Possibility of Additional Cut Within Three Months
"Balancing Economic Stimulus and Financial Stability"
"The Worst Scenario: Tariffs Rise While Housing Prices Remain Uncontrolled"

On July 10, Lee Changyong, Governor of the Bank of Korea, explained the decision to keep the base interest rate unchanged, stating, "We determined that it is necessary to calm the overheated sentiment in the housing market by preventing excessive expectations for rate cuts from forming." He added, "All members of the Monetary Policy Committee share the view that the base interest rate should not serve as a factor driving up real estate prices."

Lee Changyong, Governor of the Bank of Korea, is speaking at a press conference on the interest rate decision of the Monetary Policy Committee held on the 10th at the Bank of Korea in Jung-gu, Seoul. Provided by the Bank of Korea.

At the press conference held that day, Governor Lee emphasized, "If real estate prices in the Seoul metropolitan area begin to spread, it will create not only social and political issues but also many problems, including a sense of despair among young people." He stressed that controlling prices is as important as managing transaction volumes, as both influence the scale of household debt.

He said, "Compared to August last year, it seems that price increases are now more concentrated and rising faster in the Seoul metropolitan area. Back then, taking a pause on rate hikes quickly resolved the issue, but this time, I am not sure if a happy ending will come so soon." He continued, "We cannot look at only real estate prices when making rate decisions. The worst-case scenario would be a significant rise in tariffs while failing to control real estate prices. In such a case, opinions within the Monetary Policy Committee could be divided on whether to prioritize financial stability or economic growth when deciding on interest rates."

The following is a Q&A with Governor Lee.

-Please share the Monetary Policy Committee members' interest rate outlook for three months from now.

▲Among the six committee members, excluding myself, four expressed the view that the possibility of lowering the rate below the current 2.5% should remain open. The remaining two believe it is likely that the rate will be maintained at 2.5% even after three months. The four who are open to further cuts believe that future rate decisions should be based on incoming data, taking into account progress in US tariff negotiations and the effectiveness of the government's real estate loan management policies. The two who support maintaining the current rate argue that more time is needed to ensure financial stability and that the widening Korea-US rate gap, which could exceed 2 percentage points, should be closely monitored. I would like to emphasize once again that these are conditional forecasts.

-There is growing interest in the timing of the next rate cut. If leading indicators such as transaction volumes suggest that household debt will decrease in the future, is there a possibility of a preemptive rate cut?

▲Because there is a time lag between real estate transactions and the scale of household debt, it is possible to anticipate and respond preemptively to changes in debt. However, prices are difficult to predict. If real estate prices in the Seoul metropolitan area start to rise and spread, it will cause not only social and political issues but also many other problems, starting with a sense of despair among young people. That is why controlling prices is important. It is difficult to judge whether this issue will be resolved after August. We cannot look at only real estate prices. We must also prepare for the possibility that economic growth could fall further due to Trump tariffs. In my view, the worst-case scenario would be a significant rise in tariffs while failing to control real estate prices. This could greatly worsen the trade-off between financial stability and growth. In such a case, opinions within the Monetary Policy Committee could be divided on which to prioritize when making rate decisions.

-Should monetary policy prioritize economic stimulus or financial stability? Does the fact that four committee members forecast a rate cut after three months mean that the focus is on economic stimulus?

▲Among price stability, economic stimulus, and financial stability, the top priority is price stability. Economic stimulus and financial stability do not have a fixed order of priority and are interpreted according to the situation. In this conflicting relationship, all six committee members agreed that financial stability is important this time. After three months, the split was four to two, and the focus will be determined based on the situation at that time.

-What are your thoughts on US interest rate policy in the second half of the year? President Trump is pressuring Fed Chair Powell to cut rates. Do you believe independent monetary policy is possible? The won-dollar exchange rate is currently stable, but what impact do you expect on Korea?

▲Chair Powell has stated that his job is to make decisions based on data, and he has received much applause for this. The FOMC minutes show that members are divided on whether the impact of tariffs on US inflation will be temporary or persistent. The minutes reveal significant division. Therefore, the July decision is also uncertain, and I believe they will ultimately decide based on the data. From our perspective, it would be good if the US cuts rates in advance, but there is no rule that the gap should not exceed a certain level. The trend of a weaker dollar is likely to continue, and the burden of US monetary policy has lessened compared to the past. However, we will continue to monitor the situation.

-How do you assess the effectiveness and results of the government's June 27 measures?

▲Korea's real estate problem is unique to our country, with one of the main causes being low birth rates. There is also a strong correlation with the concentration of population in the Seoul metropolitan area and social issues such as intense competition for school admissions. As a result, household debt has risen to nearly 90% of GDP, and if it grows further, various side effects could occur. I believe we are already at a critical level that significantly constrains consumption and growth.

▲There is a trade-off with economic stimulus, but even if stimulus is delayed, it is extremely important as a policy priority to stabilize expectations and manage household debt so that housing prices in the Seoul metropolitan area do not rise further. The Bank of Korea has consistently emphasized this. I highly appreciate the bold policies announced by the current government, which shares this recognition, and believe they are moving in the right direction.

▲Regarding household debt, since transaction volumes increased previously, debt may rise for a month or two with a time lag, but transaction volumes have recently declined. If the current low level of transactions is maintained, household debt should begin to decrease. While I can state this clearly about household debt, it is difficult to say the same for prices due to various supply factors. From the Bank of Korea's perspective, both myself and the Monetary Policy Committee members agree that the scale and speed of base rate cuts should not be excessive, as this could itself become a factor driving up real estate prices. In this sense, we are taking a pause on rates to see if expectations stabilize. Please understand that the Bank of Korea and the government are working together to address real estate issues.

-Household debt seems similar to the situation in August last year. While current measures may temporarily control housing prices or transaction volumes, some argue that lifting regulations could cause a balloon effect. What do you see as the fundamental solution?

▲There are similarities between the current real estate measures and those of August last year. Back then, the intention was to lower the overall rate cycle, but market rates fell significantly, leading to an increase in household debt. While there are similarities, the difference now is that the speed of price increases is faster and more concentrated in the Seoul metropolitan area. Last August, after we paused rate hikes, we thought the issue was resolved quickly, but this time, I am not sure if a happy ending will come so soon. We are more concerned now than back then, and if current policies are insufficient, additional measures will be needed. Whether through increased supply or additional demand-side policies, there must be a way to prevent inflows into the Seoul area. I understand the government is preparing more detailed measures.

-Some members of the ruling party have criticized the Bank of Korea's calls for household debt management as overreaching. What is your response?

▲The Bank of Korea cannot be loved by everyone, regardless of what we do. The structural reforms and other issues we have raised are all related to our mandate for price and financial stability, and we will continue to conduct research in that context.

-It seems that jeonse deposits are more directly affected by monetary policy than housing prices. How seriously does the Bank of Korea view jeonse deposits?

▲There are already reports suggesting that policy finance and jeonse loans should ultimately be included in regulations such as DSR. In fact, the jeonse system itself needs to change. Jeonse is a private debt relationship created when it was difficult for the financial market to develop in the past. The system is now entrenched, making it hard to change, but large sums of money are exchanged without going through financial institutions or proper collateral, which poses a financial stability risk. This round of measures should significantly curb the practice of gap investment, so I believe there is now some room to control investment through jeonse. However, those who genuinely need jeonse for housing will inevitably suffer. It is difficult to make everyone happy, but ultimately, the jeonse system should be brought into the formal financial sector.

-Are there plans to respond with other monetary policy tools rather than rate adjustments that could exacerbate financial imbalances?

▲If rates need to be lowered for growth, but real estate makes it difficult to do so, other monetary policy tools can be used. In January, for example, we wanted to cut rates but instead used the Bank Intermediated Lending Support Facility (BILSF) due to various issues. Currently, the quota has been exhausted, so it cannot be used as in January, but there are discussions about integrating BILSF as a supplementary tool for rate policy, and we are reviewing this internally. To do so, the system would need to be changed and additional resources secured.

-In the May economic outlook, the growth rate for this year was forecast at 0.8%. With the second supplementary budget now being implemented, is it possible for growth to rise into the 1% range?

▲The first supplementary budget appears to have raised GDP by 0.1 percentage points, which was reflected in the May outlook. The second supplementary budget is also expected to raise GDP by 0.1 percentage points. Taking this into account, the growth rate would be 0.9%. Looking at the data, consumption seems to be slightly better than expected in May, and exports, especially semiconductors, are also performing well, so there could be additional positive effects from the supplementary budgets.

▲On the other hand, although we predicted that construction would bottom out in the third quarter, there are offsetting factors on the downside. Another major uncertainty is tariffs, which have been postponed until August 1. In the May outlook, we assumed tariffs of about 10% in August, but it remains to be seen whether they will be lowered after August 1, raised to 25%, or remain unchanged. While Korea's tariffs are important, we must also consider the impact of tariffs in countries where Korean companies have production bases, such as Vietnam, Mexico, and Canada. Tariffs affecting goods routed through China or the European Union are also significant.

▲Taking all these factors into account, I do not think it is possible to say that growth will reach 1% this year. After August, when tariffs in Korea and other countries become clearer and the effects of the supplementary budgets are confirmed, I will provide an updated growth outlook at the end of August.

-The second supplementary budget includes over 12 trillion won in consumer coupons to support livelihoods. What impact do you expect on the economic recovery and growth rate?

▲The consumer coupons amount to about 13.9 trillion won, and we have internal data on marginal propensity to consume by income group. For low-income households, the marginal propensity to consume is expected to be about 0.5, and for high-income groups, just over 0.2. Unlike before, these coupons are being distributed to the entire population and must be used by November, so we will need to analyze micro data early next year to assess the effect.

-Tariff negotiations are underway, and the US has also raised the issue of increasing defense cost-sharing. Have you considered any concessions Korea could make to lower tariffs, given their impact on economic growth?

▲I have personal ideas about what cards Korea could play in the US negotiations, but since negotiations are ongoing, I do not think it is appropriate for me to comment, as it could be seen as overstepping.

-Please clarify the Bank of Korea's position on the Korean won stablecoin.

▲There seems to be a lot of misunderstanding about the Korean won stablecoin. The Bank of Korea's Hangang Project actually started with the question of how to safely introduce stablecoins. The future economy will be highly digitalized, and as currency becomes digital, it will be possible to embed monetary programs. I believe digital hegemony that allows for programmable money is necessary, and no other institution has prepared as proactively as the Bank of Korea. As the President has stated, the Korean won stablecoin is absolutely necessary.

▲The issues are the method of introduction and regulation of the Korean won stablecoin. The Bank of Korea believes that allowing non-bank financial institutions to issue Korean won stablecoins could cause various problems, as it would result in the creation of numerous private currencies. If both banks and non-banks are allowed to issue them, the value of each currency could differ. For example, a stablecoin issued by a company with 1 billion won in capital cannot be considered equal in value to one issued by a bank. In the 19th century, the proliferation of private currencies caused confusion. If such confusion recurs, there could be a return to the current central bank system. Therefore, stablecoins should be issued by trusted institutions from the start, which is why the Bank of Korea advocates a bank-centered approach.

▲Second, if issuance is broadly permitted, it could conflict with foreign exchange liberalization policies. Even without a Korean won stablecoin, the proliferation of dollar stablecoins is already creating real issues, so we need to discuss how to regulate this. The introduction of a Korean won stablecoin could exacerbate these problems. Third, allowing non-bank financial institutions to issue Korean won stablecoins would mean permitting them to conduct payment and settlement operations. If they are also allowed to accept deposits, the profit structure of the banking industry could change significantly. Activities with the same risk profile as those of banks should be subject to the same regulations, so if non-banks are allowed to issue stablecoins, they should be regulated like banks. Bank regulations are very strict, including checks on owners. It would be strange if non-banks wanted to issue stablecoins but not be subject to regulation.

▲These are complex issues that the Bank of Korea cannot resolve alone. Once the Ministry of Economy and Finance and the Financial Services Commission are fully staffed, the Bank of Korea's basic position is to discuss these issues and set a direction. There is a misconception that the Bank of Korea is raising these issues to secure licensing authority, but that is not the case. The key question is whether to proceed gradually with a bank-centered approach or to include non-banks as well. Even if only banks are involved, it is better to operate within a network created and monitored by the Bank of Korea. Whether banks should issue stablecoins outside this network is something we need to consider carefully.

-There are discussions about reorganizing the financial regulatory authorities, and some say the Bank of Korea should expand its macroprudential policy role.

▲Reorganization is necessary. Household debt has not decreased for over 20 years, and the real estate project finance issue arose because macroprudential policy, while discussed, was not strongly implemented. There was no mechanism for macroprudential policy and monetary policy to work organically together. In fact, we need tools to implement strong macroprudential policy, but the government cannot do this alone. The government is naturally more focused on the economy, so even if macroprudential policy is pursued for financial stability, its intensity weakens when the economy deteriorates. Therefore, I believe that the Ministry of Economy and Finance, the Financial Services Commission, the Financial Supervisory Service, and the Bank of Korea should all be able to discuss macroprudential policy, and especially that the Bank of Korea should have a stronger voice so that macroprudential policy can be implemented robustly and without political influence.

▲Furthermore, as non-bank institutions grow, various problems arise, so from a financial stability perspective, I believe the Bank of Korea should have expanded joint inspection and investigative powers over non-bank financial institutions.

-The Hangang Project has been put on hold, but no clear reason has been given. Banks have expressed concerns about costs, but were there other structural issues?

▲I was also frustrated by media reports and think there have been many misunderstandings. Headlines often described the Bank of Korea as suspending, halting, or abandoning its CBDC project, but this is not about CBDC; it is about deposit tokens. We never considered a retail CBDC like China. The Hangang Project was about having regulated banks issue stablecoins within a secure network we created. I consider this a temporary suspension. We had a roadmap for commercialization after pilots 1 and 2. But at the end of pilot 1, discussions about non-bank won stablecoins intensified, and banks wanted clarity on whether the Bank of Korea would ensure a bank-centered approach before making further investments. Many indicated they would participate in the second phase once the uncertainty was resolved. The Bank of Korea cannot answer this alone, as it is not within our legal authority; discussions must be held with the Ministry of Economy and Finance and the Financial Services Commission. We will revisit the project once the direction is set in consultation with these stakeholders. The claim that banks are unable to participate due to tens of billions in costs is not the real reason, nor is the lack of a roadmap. Institutions without legal or supervisory authority cannot be expected to proceed unconditionally without government agreement. Once the burden is lifted through discussions with the government, I expect banks to actively participate.

-With the growing gap between the Bank of Korea's base rate policy and variable loan rates, some argue that summoning bank CEOs is more effective than rate policy. Should this be seen as coordination between monetary policy and macroprudential policy, or has government market intervention seriously distorted the transmission of monetary policy, especially the credit channel?

▲This is a difficult issue with no way to satisfy everyone. What we manage is the ultra-short-term rate, so 2- or 3-year market rates can change depending on expectations. When rates are rising or falling, the changes can be significant. For example, in August last year, loan rates fell below the base rate, which was not problematic. Regarding the impact of net interest margins on household lending, one can argue whether this aligns with market principles, but since the base rate affects various rates, it is an exaggeration to say there is a problem based on this alone. However, because the share of mortgage loans is so high, distortions could be more meaningful in Korea than elsewhere.

▲Even if distortions occur, real estate accounts for a large share in Korea, and the associated social issues are significant. With 70% of bank household loans concentrated in real estate, this is not good for stability. I believe this problem must be addressed. When the problem is minor or absent, it can be handled through market mechanisms, but when it is serious, correcting it inevitably brings side effects. I think such side effects are necessary in Korea as part of the solution. For example, if we tell banks not to exceed a household lending cap, banks cannot selectively raise loan rates above other rates. Criticizing banks for profiting from rate differentials in this context is also misguided. Any small side effects that arise from policy should be acknowledged and addressed as we move forward.