[Q&A] Lee Chang-yong: "Did the Exchange Rate Rise Because the Korean Economy Collapsed? I Do Not Agree With Pessimism"

January Monetary Policy Press Conference
Unanimous Agreement on Rate Freeze
Only One Member Now Sees Rate Cut Within Three Months
"We Will Not Raise Rates Just to Control the Exchange Rate... Focus Will Be on Inflation"
"Rising Exchange Rate Does Not Mean a Financial Crisis... Dollar Liquidity Is Ample, the Issue Is Lack of Selling"

Lee Chang-yong, Governor of the Bank of Korea, stated on January 15 that "it is undeniable that the exchange rate was an important factor in the decision to keep the base rate unchanged."

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 January 15, 2026. Photo by Kang Jinhyung

At the press conference on monetary policy direction held that day, Governor Lee explained the decision to maintain the base rate at 2.50% per annum in these terms. However, regarding recent discussions that fundamentals such as the Korea-U.S. interest rate gap and growth rate differences are the reasons for the recent rise in the exchange rate, he said, "Those are indeed underlying factors, but I do not believe they are the primary drivers. Rather, I see the growth relationship in equities and the flow of AI-related stocks as having a greater impact on exchange rate supply and demand."

Governor Lee also addressed concerns that pessimism about the Korean economy is supporting demand for the dollar, saying, "I do not agree with the characterization that our economy is pessimistic." He continued, "It is important to raise our potential growth rate and maintain a sense of urgency, but there are also many positives. To say that the Korean economy is doomed and that is why the exchange rate is rising is an exaggeration."

Regarding the exchange rate increase at the beginning of the year, Governor Lee said, "About three-quarters of the rise was due to a strong dollar, a weak yen, and geopolitical risks, while the rest was due to factors unique to Korea," adding, "Before the year-end supply and demand stabilization policies, the exchange rate rose regardless of the dollar, but there is a qualitative difference compared to that period."

On the current high exchange rate trend, he explained that it is not due to a shortage of dollars, but rather an abundance of dollars that are not being sold. Governor Lee said, "The foreign exchange market consists of the lending market, where dollars are borrowed and lent, and the spot market, where dollars are bought and sold. In the lending market, the value of the dollar is at a historic low because there are many lenders. On the other hand, in the spot market, the price of the dollar is very high because people are not willing to sell. There is plenty of dollar liquidity, but because of expectations of further increases, people are only lending, not selling, which has created this market dynamic."

He dismissed some calls to raise the base rate to lower the exchange rate, saying, "Monetary policy is not set based on the exchange rate itself, but on its impact on inflation. To control the exchange rate with the base rate, we would need to raise it by 2-3 percentage points, which would cause significant pain for many people. We will make a comprehensive judgment on this."

The following is a Q&A with Governor Lee.

-Were there any dissenting opinions in this Monetary Policy Committee decision?

▲All members agreed to keep the rate unchanged. There were no dissenting opinions. Every committee member agreed that although recent growth has improved somewhat compared to the November meeting, financial stability risks such as housing prices and the exchange rate remain or have even increased, making it appropriate to maintain the current base rate level.

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

▲Of the six committee members excluding myself, five believe it is highly likely the base rate will remain at 2.5% after three months. The remaining member felt that a rate cut should still be considered. The five who expect a freeze believe that the current economic situation is likely to persist over the next three months, so it is necessary to keep the rate on hold and monitor financial stability. The one member who sees a possibility for a cut cited the still-weak recovery in domestic demand. However, it was also noted that future policy direction should be determined by monitoring changes in financial stability variables such as housing prices and the exchange rate.

-There was no mention of a rate cut or additional cuts in the monetary policy statement. Does this mean the freeze will be prolonged, or that a reassessment of policy is needed?

▲It seems that most members expect a freeze over the next three months. Beyond that, there is still significant uncertainty, so it is hard to be definitive. While upside risks to growth have increased slightly, there are both upside and downside factors, and the impact on inflation will also depend on the exchange rate. Given the many uncertainties, such as the future direction of U.S. monetary policy, the general consensus among committee members is that it is better to make another decision after reviewing the data, rather than speculating now about the direction six months from now.

-There seems to be a difference in growth expectations between Korea and the U.S., which may be behind the high exchange rate. You have also mentioned the K-shaped recovery and the gap with perceived economic conditions. What do you think about the view that such pessimism is supporting dollar demand?

▲That could be the case, but while fundamentals like growth rate and interest rates are important, I do not believe they are the primary drivers of the current exchange rate. Looking at supply and demand, rather than capital outflows through the bond market, it is the attractiveness of the U.S. stock market and AI stock trading that are drawing Korean overseas investments into equities. I believe the growth relationship in equities and the flow of AI stocks have a greater impact on exchange rate supply and demand than interest rates. Fundamentals are indeed the underlying factors, but over the past year, the growth rate has risen from 0% at the start of the year to 1.8% now, and the interest rate gap with the U.S. has narrowed from its peak. While we are holding rates steady, the U.S. is more likely to cut rates. Even though fundamentals have improved recently, the exchange rate has continued to rise, indicating that supply and demand factors beyond fundamentals are also at play.

▲I also do not agree with the term "pessimism about the Korean economy." While it is true that Korea's potential growth rate has declined and needs to be raised, and a sense of crisis is necessary, as we have repeatedly stated in our restructuring papers, there are also many positives. For example, as AI is driving the global economy, how many countries besides the U.S. and China have their own industrial capabilities in AI? I believe Korea is one of them. Although low birth rates have reduced growth and political instability due to martial law has at times driven growth to 0%, to say that the Korean economy is doomed and that is why the exchange rate is rising is an exaggeration. We must reflect and work to raise our potential growth rate, but I do not agree with the pessimistic narrative.

-Is there a possibility that the growth forecast for Korea in 2026, previously projected at 1.8% last November, could be revised upward?

▲At least for the next year, the outlook for the AI-related semiconductor industry is very positive. However, this morning the U.S. raised the issue of semiconductor tariffs. Our 1.8% growth forecast assumed tariffs of around 15%. Whether the rate will be raised to 25%, or whether only semiconductors bound for China will be affected, remains to be discussed. There is upside risk from AI, but also significant uncertainty due to such geopolitical risks.

-Was the exchange rate an important factor in the decision to freeze the base rate this time?

▲This is easy to answer. It is undeniable that the exchange rate was an important reason for the (freeze) decision.

-This year, the exchange rate seems to be returning to pre-intervention levels. What do you see as the reason?

▲After various exchange rate stabilization policies, the rate fell to 1,430 won but rose again to 1,470 won yesterday, so I have mixed feelings about the effectiveness of these policies. We are still reviewing, but I would not say the year-end supply and demand stabilization policy was completely ineffective; it provided an opportunity to identify our weaknesses. When the rate rose to 1,480 won at the end of the year, we intervened not because of volatility but because the level had become too disconnected from fundamentals, with pessimism about the economy and the won widespread, creating one-sided expectations. Not intervening could have caused various side effects. The recent rise to 1,470 won is qualitatively different from the earlier increase. We found that about three-quarters of the rise was due to external factors such as a strong dollar, weak yen, and geopolitical risks in countries like Venezuela, while the rest was due to domestic factors. In December 2025, the exchange rate rose regardless of the dollar, so there is a qualitative difference.

-What do you think about criticisms that the authorities' response has been ineffective, and that there are limits to intervention capacity?

▲One thing I felt strongly this time is that the National Pension Service has a significant impact on the foreign exchange market, and I am very grateful to the Ministry of Health and Welfare and the National Pension Service for cooperating in adjusting supply and demand. Since the end of December 2025, the National Pension Service has steadily hedged foreign exchange and reduced overseas outflows, which has helped the supply-demand balance. Large corporations also brought in more foreign currency, which helped resolve the issue. However, after individual investors' dollar purchases fell to a certain level, large-scale buying resumed. In January, funds for overseas securities investment by individual investors were similar to or higher than the high levels seen in October and November 2025. U.S. stocks continue to rise, and expectations of a weaker won persist.

▲However, please do not say I am blaming any particular group. I am simply explaining the market pressures, and there are rational reasons behind individual decisions. I am not saying it is wrong, just that this flow is continuing. For stabilization, it is still necessary to change short-term supply-demand imbalances and expectations of a weaker won.

-The won-dollar exchange rate fell overnight following comments by U.S. Treasury Secretary Scott Bessent. What do you think was behind his remarks? Do you believe the U.S. is concerned that continued won weakness could make investment in the U.S. more difficult?

▲His comment that the won is significantly undervalued relative to Korea's fundamentals is something any academic would agree with, regardless of the model used; 1,480 won cannot be explained by fundamentals. Secretary Bessent would not have made such a statement unless it was clearly supported by theory. He was simply describing the situation.

▲The Korea-U.S. investment agreement stipulates in principle that if foreign exchange market instability reaches a certain level, the amount invested can be adjusted. The Bank of Korea shares responsibility for this. Therefore, when the foreign exchange market is unstable, $20 billion cannot be transferred abroad; I can state this clearly. Regardless, there are recurring rumors-often spread on YouTube-that $20 billion will flow out, causing the won to weaken. I want to make it clear that this is not true. If the foreign exchange market is stable, of course, the MOU must be honored, but in difficult times, the Bank of Korea can intervene to prevent such outflows. I hope such false news does not further fuel expectations of a weaker won.

-There is talk that mid- to long-term measures are needed for the foreign exchange market, not just short-term supply-demand solutions. Has anything been discussed at the policy level?

▲It is undeniable that if Korea's fundamentals improve, foreign investors will return and the stock market will improve, leading to more domestic investment. Efforts to raise potential growth and strengthen fundamentals must continue for our long-term welfare. However, it is not realistic to expect that simply raising long-term growth or improving the stock market will quickly resolve the exchange rate issue. Recently, there has been criticism that we are only focusing on short-term supply-demand factors and neglecting fundamental causes, but we are well aware of the underlying issues. When exchange rate problems arise, should the central bank governor only talk about strengthening fundamentals and long-term restructuring? I believe it is the responsibility of policymakers to address both long-term and short-term measures.

-Could the semiconductor boom have a positive impact on potential growth?

▲Currently, semiconductors, shipbuilding, and defense are boosting our growth rate. Unfortunately, petrochemicals and steel are struggling, so the K-shaped recovery is splitting the economy by sector. In the long term, how much growth can be raised depends on the semiconductor cycle. Over the next 1-2 years, the situation could change, or new competition could emerge, so it is difficult to say how much a particular industry will affect potential growth.

-Expectations for a rate cut have weakened. Do you think rising market rates will help stabilize housing prices? What is your outlook for the real estate market?

▲Market rates have risen in anticipation of a rate cut. The interpretation is that, for some reason, there were many bets on further base rate cuts, despite repeated denials. This contributed to the rise in the exchange rate and housing prices, so I felt it was necessary to send a strong message, which is why I said in an external interview in November 2025 that a shift was needed. I did not mean a rate hike, but wanted to signal that continuous cuts were not guaranteed. At the time, expectations for rate cuts were excessive, and even if it meant criticism, I felt some adjustment was needed. The central bank cannot ignore excessive one-sided expectations. As a result, expectations for further rate cuts have disappeared, and the situation has normalized. Those who bet on rate cuts have suffered losses, but monetary policy is not only for bond market investors, so such losses were inevitable, and I apologize for that.

▲While higher rates will restrict real estate activity, I do not believe this alone will fully stabilize the market. Comprehensive government measures are needed.

-There is criticism that abundant liquidity has driven up both the exchange rate and real estate prices. Although the Bank of Korea has explained this several times, concerns persist. How do you view this?

▲This is the most distressing and infuriating issue for me recently. How can such claims be made without checking the facts? During my tenure as governor, I have focused on reducing household debt for financial stability. As a result, the growth of broad money (M2) has stopped and not increased. The claim that M2 growth caused the exchange rate to rise, and that the Bank of Korea has been flooding the market with money, is simply not true.

▲Recently, there have been claims that Korea's M2-to-GDP ratio is about 150%, compared to 70% in the U.S., implying double the liquidity. I am not aware of any theory that ignores country differences and simply declares liquidity is high. The ratio is determined by each country's financial structure-whether it is bank-based or capital market-based, among other factors. Declaring high liquidity without considering these factors is not a valid argument.

-Even if the exchange rate reaches 1,500 won, do you still believe it does not constitute a traditional financial crisis?

▲If you ask whether 1,480 won is a financial crisis, the answer is no, because Korea is now a net external creditor. In the past, financial crises occurred because Korea had large foreign currency debts, so when the exchange rate rose, there was a rush to repay those debts, leading to defaults and crises. Now, however, Korea has significant external assets. Of course, there will be winners and losers from a higher exchange rate-ordinary people and domestic companies will face difficulties, and there may be internal challenges. We must manage this situation carefully. However, I would not call it a financial crisis.

▲To put it more intuitively, some say it is hard to obtain dollars because of the high exchange rate, but there is actually plenty of dollar liquidity. The problem is that dollars are not being sold in the spot market. People prefer to hold onto their dollars and lend them out. The foreign exchange market consists of the lending market and the spot market. Korea has a large current account surplus and significant capital inflows. However, those holding dollars are not selling in the spot market, only lending. As a result, indicators such as swap spreads show the value of the dollar is at a historic low in the lending market due to the abundance of lenders. On the other hand, because people are not selling, the dollar price is very high in the spot market. In the past, these two markets moved together, but now, despite abundant dollars, expectations of further increases have created a market where people only lend, not sell. Therefore, I do not expect a financial crisis to occur.

-The Korea-U.S. interest rate gap is often cited as a reason for the high exchange rate. What do you think of arguments that the monetary authorities should leave room for rate hikes?

▲If the high exchange rate affects inflation, of course, rates will be raised. If growth rises and the output gap increases, we will need to raise rates. More importantly, even if we are slow to raise rates, if the U.S. cuts rates, the gap will narrow. Over the past year, the Korea-U.S. rate gap has narrowed, yet the exchange rate has risen. Thus, we set rates based on inflation and growth, not just the exchange rate. Raising rates alone does not guarantee the exchange rate will stabilize. In fact, this would be a reversal from the past year's direction. Many who emphasize fundamentals argue that Korea's lower growth and less attractive stock market are to blame, but if we raise rates too aggressively, it could actually accelerate capital outflows. Six months ago, there were criticisms that not cutting rates was hurting growth. Now, with the exchange rate rising, some argue that not raising rates is the problem. The Bank of Korea sets rates based on the exchange rate's impact on inflation. To control the exchange rate with rates, a 25bp hike would not suffice; it would require a 200-300bp increase, which would cause significant pain. We will make a comprehensive judgment. We are moving from a rate-cutting phase to a hold phase, and may raise rates further if necessary, but will not be swayed by every fluctuation. Implementing monetary policy in a way that has been proven globally will bring stability to the exchange rate market, and that is our plan.

-The KOSPI has hit record highs for 10 consecutive trading days. At the October 2025 Monetary Policy Committee meeting, the index was around 3,800, and you said it was not a bubble. Now it has risen by 1,000 points in just a few months. What is your assessment?

▲At the time, when asked if the KOSPI could go higher, I said there was "room," especially in overseas sectors, but did not specify a particular level. Stock prices have risen significantly, but the market is also split in a K-shaped pattern. Semiconductors have surged, which is related to the exchange rate, as exporters benefit from a weaker won. On the other hand, domestic companies are suffering more due to the exchange rate, so the stock market is divided. I believe the semiconductor cycle will last more than a year, with solid demand, and sectors like defense and shipbuilding are also strong. Therefore, Korea's market is more stable than others. However, these sectors are highly sensitive to overseas demand and expectations can shift quickly, so even if the semiconductor cycle lasts a year, there could be corrections depending on how things develop. It is difficult to make a definitive statement. The AI sector has risen sharply and has further potential, but it is more affected by overseas developments than the domestic economy, so uncertainty is very high.

▲Meanwhile, stocks that have not risen much could benefit from structural changes in the market, governance reforms, or exchange rate stabilization. There is still potential for low PBR and PER stocks to rise. If investors believe the domestic market will never change and are determined to invest only overseas, the domestic market will not improve. That is why I have suggested to the National Pension Service that while overseas investment is important, if everyone invests abroad, the domestic market could deteriorate further, accelerating outflows. The National Pension Service should consider these macroeconomic effects and review its domestic investment ratio. Ultimately, it is difficult to specify a particular level, but the stock market will change depending on our efforts, restructuring, and shifting expectations.

-In your New Year's address, you mentioned a K-shaped recovery, which is a global topic. What aspect of polarization concerns you most? Do you think monetary policy can address it?

▲The difference between polarization in Korea and other countries is that Korea has a highly developed subcontracting structure. Nowhere else in the world is subcontracting as advanced. Therefore, it is impossible to separate from large corporations, but subcontractors of successful large companies, as well as those in sectors like steel and petrochemicals that require restructuring, could face difficulties. Korea's K-shaped polarization is likely to be linked to this subcontracting structure, unlike in other countries. For example, if the auto industry shifts to electric vehicles, the engine sector will struggle. This polarization is related to structural changes in industry.

▲Such issues cannot be solved by monetary policy alone. Structural reforms and fiscal policy are required. The Bank of Korea does have policy tools such as the Bank Intermediated Lending Support Facility, but these are not intended to solve structural issues like K-shaped polarization. Our aim is to use such tools to mitigate the impact of monetary policy on sectors that are particularly sensitive, not to address structural problems directly. We are working to improve policy in this direction, to moderate the effects of monetary policy where needed.