[Q&A] Lee Chang-yong: "Will We Keep Waiting If Real Estate Prices Stay High? That's Not the Case"

October Monetary Policy Committee Press Conference
Lee Chang-yong: "Base Rate Frozen, Only Shin Sung-hwan Dissenting"
Possibility of Additional Cuts Within Three Months Drops from Five to Four Members
"Rate-Cutting Trend Continues, but Timing and Scale Adjusted"
On Possibility of November Freeze: "Many Variables, High Uncertainty"
On Recent Asset Price Increases: "Stocks Are Productive, Real Estate Eats Into Growth"

On the 23rd, Lee Chang-yong, Governor of the Bank of Korea, stated, "The trend toward interest rate cuts will continue, but the timing and scale of the cuts have been adjusted," adding, "However, regarding how long we will maintain the freeze, it does not mean we will keep waiting just because real estate prices are high."

Lee Chang-yong, Governor of the Bank of Korea, is speaking at a press conference on the monetary policy committee's interest rate decision held at the Bank of Korea in Jung-gu, Seoul on the 23rd. Photo by Yonhap News Agency Joint Coverage Team

At the press conference on monetary policy direction held that day, Governor Lee said, "Interest rate decisions must take into account both the real estate market and the overall economy. Even if real estate prices continue to rise, if the economy collapses, we will have no choice but to lower rates based on economic conditions."

When asked about the conditions for resuming rate cuts from a financial stability perspective, he responded, "The risks related to household debt have largely dissipated, and what remains is the issue of prices. However, I do not believe that stability is achieved only when real estate prices fall. I think we need to see signs that the growth trend is stabilizing and slowing to some extent." Governor Lee continued, "We cannot control real estate prices through monetary policy; that is the role of government policy. Monetary policy should be seen as not fueling further increases in real estate prices."

On this day, the Monetary Policy Committee of the Bank of Korea kept the base interest rate unchanged at 2.5% per annum for the third consecutive time. Explaining the background for the freeze, Governor Lee said, "As the housing market in the Seoul metropolitan area is showing signs of overheating again and the government has announced additional measures in response, it was deemed necessary from a monetary policy perspective to avoid stimulating expectations of further increases in housing prices."

He added, "In particular, the outcomes of the Korea-US and US-China trade negotiations, which are expected to take shape around next week's Asia-Pacific Economic Cooperation (APEC) meeting, will be the most important factors in gauging future growth trends. In addition, the results of the US Federal Reserve's meeting, as well as the pace and duration of the semiconductor industry upturn, should be closely monitored to reassess growth trends beyond next year."

The following is a Q&A with Governor Lee.

Lee Chang-yong, Governor of the Bank of Korea, is speaking at a press conference on the interest rate decision by the Monetary Policy Committee held on the 23rd at the Bank of Korea in Jung-gu, Seoul. Photo by Yonhap News Agency Joint Coverage Team

-Was there a dissenting opinion in this Monetary Policy Committee decision?

▲Shin Sung-hwan, a member of the Monetary Policy Committee, expressed the view that it would be desirable to lower the base rate to 2.25%. While he was concerned about financial stability related to the housing market, he believed that given the current situation where the GDP gap ratio remains significantly negative, it would be preferable to cut rates as soon as possible and then monitor the impact on the economy and financial stability before making further decisions.

-What are the Monetary Policy Committee members' outlooks for interest rates over the next three months?

▲Of the six members excluding myself, four believe that the possibility of a rate cut to a level lower than the current rate should be kept open, while the remaining two believe it is highly likely that the rate will remain at 2.5% even after three months. Compared to the August monetary policy direction, the number of members indicating the possibility of a cut versus a freeze has shifted from 5-to-1 to 4-to-2. This reflects that while the rate-cutting trend continues, rising financial stability risks since August have led one member to shift from favoring a cut to supporting a freeze.

-Given that you mentioned the rate-cutting trend will be maintained even after this freeze, do you think real estate investors will continue to expect a rate cut in the near future?

▲The gist of the question seems to be whether freezing the rate this time will lead people to believe that the rate-cutting cycle will continue, thereby impacting the real estate market, and whether it would be better to cut rates now and then freeze them to dispel such expectations. However, the reason we cannot cut rates and then freeze them now is that we are not only considering financial stability but also the current weak economic conditions. If we ignored the economy, we could do so, but that is not the case right now.

-Do you think this freeze will have a tangible effect on stabilizing housing prices?

▲Regarding the effect of the freeze, if we had cut rates this time, it could have actually reduced investment costs and accelerated increases in real estate prices. By freezing rates twice in July and August, people might expect that while we are in a rate-cutting cycle, the pace and scale of cuts will be slower and more gradual.

-If there are no significant changes in the real estate market, will the base rate also be frozen in November?

▲There are likely to be many variables in November. For example, how our country's tariff negotiations proceed, as well as the outcome of US-China tariff negotiations, will have global impacts. The semiconductor cycle is currently strong, but if US-China tensions intensify, the cycle's continuation is uncertain. Since we also release an economic outlook in November, there are many variables, and I will be able to comment on the decision then. There is a high degree of uncertainty.

-Some in the market say a rate cut in the fourth quarter is impossible, and expectations for a cut have receded. Do you think this is a reasonable view?

▲The shift in the three-month rate outlook from 4 (cut) to 2 (freeze) reflects a greater focus on financial stability. The rate-cutting trend will continue, but it is true that the timing and scale of cuts have been adjusted. As for whether there will be no cuts at all in the fourth quarter, the uncertainty is too great to say.

-From a financial stability perspective, what conditions do you think are necessary to resume rate cuts? Is it necessary to see real estate prices fall, or is it sufficient to see a slowdown in household debt due to reduced transactions?

▲Real estate involves several issues, including household debt and prices. Given the changes in transaction volume due to the new policy, the risks related to household debt seem to have largely disappeared for now. What remains is how prices will move, but interest rate decisions are a comprehensive issue that must consider both real estate and the overall economy. Even regarding real estate prices, I do not believe that stability requires prices to fall. Since prices are still rising, I think we need to see the growth trend stabilize and slow down to some degree.

-Should this be interpreted as meaning, "Real estate prices should fall, but monetary policy cannot wait until then"?

▲Assuming that we will wait until real estate prices fall gives the impression that the Bank of Korea can control real estate prices through interest rates, which is misleading. Real estate is influenced by more social factors than core inflation, and it cannot be perfectly controlled through monetary policy. Unlike inflation targeting, where rates can be raised if inflation exceeds 2%, we must make comprehensive judgments. We can control prices, but real estate prices are determined by government policy. Please understand that monetary policy will not be directed toward fueling further increases in real estate prices.

▲Will we keep waiting if real estate prices are high? No, that is not the case. If real estate prices keep rising but the economy collapses, we will have no choice but to lower rates based on economic conditions. Conversely, we also need to consider whether a rate cut would overheat the real estate market, and whether not cutting rates would worsen the economy.

-Some academics say the impact of rate cuts is weakening. If rates are cut, how much do you think it will help economic recovery?

▲On average, quantitative analysis shows that a 100 basis point cut raises the growth rate by about 0.24%. However, it is too early to say statistically whether this cycle will have less impact, as we need to see the cycle play out. So far, the data suggest that rate cuts may be having more of an effect on raising asset prices than stimulating the economy, but it is too soon to confirm this statistically.

-At the last monetary policy direction meeting, you mentioned a negative scenario where "tariffs rise, household debt is controlled, but real estate prices keep rising, intensifying conflicting relationships." How do you see the current situation?

▲I said we should carefully watch whether conflicting relationships between trade issues and real estate, and between growth and real estate prices, are intensifying in terms of financial stability. In fact, things worsened in September. Whether things will improve or deteriorate further will depend on the direction of various issues around the upcoming APEC meeting.

-In the past, in 2014, the rate-cutting cycle was followed by more than a year of freezes, and then cuts resumed. In such cases, is the rate-cutting trend considered to have continued?

▲It is difficult to define a rate-cutting cycle as lasting exactly three or six months, as it is determined retrospectively. However, we are not looking as far as a year ahead. We are considering the rate-cutting cycle over a much shorter time frame.

-There are calls for the government to stop publishing weekly real estate price statistics. What is your view?

▲Suppressing statistics will not change reality. Not publishing them is not necessarily a solution. Of course, there are issues with the statistics-such as confusion due to low transaction volumes. We need statistics that show the full volume of transactions. Since statistics are focused on apartments, it is also meaningful to show prices and housing costs for non-apartment properties.

▲The reason the Bank of Korea pays attention to housing prices is because of housing costs. However, in Korea, housing prices have become more like asset prices. Focusing only on apartment prices, especially in Seoul and Gangnam, means viewing the apartment price index as an investment asset rather than a cost-of-living index. If the market operates in that way, the Bank of Korea should not base monetary policy on it. Just as we do not set monetary policy based on stock prices, we should consider whether apartment price statistics truly reflect housing costs in Seoul.

▲There are frequent complaints about housing as a "ladder," but the real estate market seems to be focused more on hitting the jackpot than on addressing housing costs, which is causing significant social problems.

-Why do you think asset prices such as stocks are rising rapidly even though the base rate is at a neutral level? Are you concerned about the asset market booming while the real economy is slowing?

▲The base rate is around the middle of the neutral range, and while the financial condition index shows that stock prices have risen and conditions have eased, there is not a large difference, so liquidity in the market is not excessively abundant from a policy perspective. The 8% increase in broad money (M2) is due to previously accumulated liquidity moving from other assets into short-term deposits, stocks, and real estate. The Bank of Korea can only control new liquidity through rates and lending, but the movement of previously accumulated liquidity is likely driving asset prices, especially certain asset classes.

▲Regardless of whether there is a bubble, I believe that real estate prices in Seoul and the metropolitan area are too high to maintain Korea's income level and social stability. In contrast, stock prices are not excessively high by international standards. Since Korean stock prices move in line with global trends, the overall average is not something to worry about as a bubble. However, there is much debate both in Korea and globally about whether the AI sector is a bubble, so there may be a correction.

-If the Bank of Korea has reason to raise its economic growth forecast amid rising asset prices, do you think this would weaken the case for continuing the rate-cutting trend?

▲You mentioned the premise that rising asset prices lead to higher growth rates, but it is important to distinguish which assets are rising. Rising stock prices are very productive and stimulate consumption. However, rising real estate prices exacerbate inequality and erode potential and actual growth rates. During the National Assembly audit, I said that systems such as the jeonse system should be abolished, even if it causes pain, because structural reform of the real estate market must continue. However, for those who suffer as a result of policy-such as those struggling with high monthly rent-there should be policy responses such as tax benefits for those paying rent.

-Is there a risk that the rise in the exchange rate will fuel inflation?

▲We are closely monitoring whether the exchange rate could lead to higher inflation. So far, despite a significant rise in the exchange rate, inflation has remained stable because oil prices have fallen by about 18% this year. Also, since the growth rate is still well below potential, there is little demand pressure. For this reason, we expect inflation to remain stable even if the exchange rate rises.

-What do you think are the main factors behind the recent rise in the exchange rate?

▲Since the monetary policy direction meeting on August 28, the exchange rate has risen by about 35 won over the past month. About a quarter of this is due to the strength of the US dollar. The remaining three-quarters are due to the weakening of the yuan amid US-China tensions, the weakening of the yen as Japan's newly inaugurated prime minister pursues expansionary policies similar to Abenomics, concerns over Korea's tariff issues, and the method of securing 350 billion dollars in funding. Regional and domestic factors have played a major role in the depreciation of the won.

-Recently, in addition to investment in the US, increased overseas securities investment by domestic residents has raised demand for dollars, and the weak yen has also had an impact. Even if tariff negotiations are reasonably resolved, is it possible for the exchange rate to fall below 1,400 won?

▲The increase in overseas securities investment is indeed putting upward pressure on the exchange rate. This trend has accelerated, and this year, the volume of securities investments going out of Korea is about four times greater than the volume of securities brought in by foreigners. In other words, a significant amount of Korean capital is flowing overseas.

▲If tariff negotiations are successful, it should help lower the exchange rate. Looking at the dollar index trend, uncertainty over Korea's tariff negotiations is putting upward pressure on the exchange rate. If the uncertainty disappears, the exchange rate should fall. In particular, if tariffs are reduced from 25% to 15%, it will have a positive effect. On the other hand, if concrete details emerge about how the 350 billion dollars in funding will be secured and invested, we will be able to assess the impact on the foreign exchange market more precisely. These two factors will likely interact.

-There is talk of 25 billion dollars in tariff negotiations to be paid over eight years. You have said that an annual level of 15 to 20 billion dollars would be stable and not shock the market. What is your assessment?

▲We need to see how the negotiations unfold. It is too early to comment, as we need to see whether everything written in the MOU will be implemented, and what legal effect Japan's MOU will have. I will comment once the negotiating team returns and a decision is made.