[Q&A] Lee Changyong: "NPS Currency Hedging and Corporate Dollar Selling Are Lowering the Won"

February Monetary Policy Committee Press Conference
Lee Changyong: "We cannot be at ease due to supply-demand pressures from individual investors and external factors"
"IT-driven growth, rising stock prices, and AI could deepen polarization"

Bank of Korea Governor Lee Changyong commented on the recent decline in the dollar-won exchange rate, saying, "In recent weeks, the perception has taken hold that the exchange rate is more likely to fall below 1,500 won than to move up to 1,500 won, and this sentiment is lowering the exchange rate through supply and demand factors, such as companies beginning to sell dollars." However, he drew a line, saying it is still too early to be relieved, as supply and demand pressures from individual investors' overseas investments and other factors remain.

At a press conference on the monetary policy stance on the 26th, Governor Lee assessed the recent exchange rate movements, saying, "The exchange rate had been fluctuating under the pressure of supply and demand stemming from residents' overseas investment and foreign investors' stock selling, as well as being affected by movements in neighboring currencies such as the yen, but it has fallen quite significantly in recent days."

As the main reason for the recent decline in the exchange rate, he cited the National Pension Service's plan to adjust the scale of its overseas investments and expand its currency hedging as key factors in easing one-sided expectations. Governor Lee said, "A few weeks ago, the National Pension Service announced that it would reduce this year's overseas investments by more than 20 billion dollars and that it would apply more flexible currency hedging to its overseas investments, and I think that contributed greatly."

He made it clear, however, that it is not yet at a stage where one can be relaxed about the future outlook for the exchange rate. Governor Lee said, "Last year, domestic factors that drove the market to believe the exchange rate would rise above 1,500 won regardless of the U.S. dollar have improved, but this year in January and February, the exchange rate moved considerably due to external factors such as U.S. artificial intelligence (AI) stocks, a U.S. Supreme Court ruling on tariffs, and Japan's fiscal policy."

On the real estate market, he assessed that although the government's measures have calmed the upward trend, it is still too early to tell whether long-term stability will be achieved. "While maintaining demand management and macroprudential regulations, a consistent policy mix is needed, including expanding supply and improving the tax system," he said, adding, "Excessive increases in household loans through real estate could undermine financial stability."

Regarding the recent stock market boom, including the Kospi breaking through the 6,000-point level, he said, "This is the result of improvements in the capital market system and in the performance of major industries," but he also expressed concern about the possibility of polarization stemming from the benefits of rising stock prices. He noted that gaps could widen between industries such as IT manufacturing and non-IT sectors, and between higher-income earners and middle- to lower-income earners. Governor Lee remarked, "Since a significant portion of our stocks is held by higher-income earners and institutions, the extent to which people benefit from rising stock prices differs by income level, which will contribute to polarization."

Bank of Korea Governor Lee Changyong is presiding over the plenary session of the Monetary Policy Board at the Bank of Korea headquarters in Jung-gu, Seoul, on Feb. 26, 2026. Photo by Joint Press Corps

The following is a Q&A session with Governor Lee.

-At this meeting as well, was the three-month interest rate outlook, which had been the usual form of communication, presented? This month, the conditional interest rate outlook was revised. The newly released dot plot leans toward holding rates steady, but there were also views favoring cuts and hikes. More dots were placed on the cut side; does this reflect uncertainty about the economy in the second half of the year, or is it because of weak growth in the non-IT sector?

▲Looking at the conditional policy rate outlook for six months ahead, 16 dots were placed on holding at 2.5%, 4 on cuts, and 1 on a hike. Once the overall discussion is over, the dots are anonymized, so it is not possible to identify who placed which dot. Summarizing the discussion before the dots were placed, in the case of those who suggested 2.25%, they saw a recovery underway, but because it is a K-shaped recovery, the differences in recovery speed are large, so there is a need to support growth. It is also presumed that this reflects the expectation that in six months' time, financial conditions in the exchange rate and housing market will be more stable than they are now. In contrast, the single dot at 2.75% appears to reflect concerns that inflation could rise due to changes in variables such as the exchange rate or oil prices. There was no discussion at the three-month horizon that, unlike at six months, interest rates should be raised. For the same reasons discussed at the six-month horizon, none of the Monetary Policy Committee members who saw some possibility of raising rates at six months placed a dot indicating a hike at three months.

-You raised this year's growth forecast to 2% and lowered next year's growth forecast to 1.8%. This can be seen as the output gap turning positive. Could the GDP gap also be positive next year?

▲Regarding the GDP gap, I think this year's 2.0% growth rate is slightly above the potential growth rate. I actually think next year's 1.8% growth rate is closer to the potential growth rate. Taking into account our country's aging population and the fact that last year's growth rate was 1.0%, the GDP gap is likely to remain slightly negative this year. We expect the GDP gap to cross into positive territory in the middle to latter half of 2027.

-With the upward revision to the economic growth forecast and the stabilizing trends in household debt and the exchange rate, both upside and downside factors for rate adjustments appear to be weakening. How do you assess recent market interest rates and the effects of the government's real estate measures?

▲The Monetary Policy Committee members' views are now presented as dots for the one-month and six-month conditional outlooks. Seeing that most dots are clustered at 2.5%, I believe this well reflects the members' view that "at least over the next six months, the likelihood of raising or lowering rates is low." As for the policy rate, the three-year government bond yield has risen to 3.2%. Over the past month, the spread over the policy rate has widened to more than 60 basis points (1bp = 0.01 percentage point). This is close to levels seen during a rate-hiking phase, so I think the spread may be excessive. Expectations of a rate hike by the second half of the year and money moving in response to the buoyant stock market may have played a role. In addition, discussions about a possible supplementary budget may have raised concerns about its impact on the volume of government bond issuance. All of these factors seem to have interacted in a complex way. I think it would be desirable for the market to adjust after taking into account the six-month conditional outlook released by the Monetary Policy Committee.

▲Regarding real estate, recent data show that following the government's latest policies, the upward trend in housing prices in Seoul has indeed been easing. However, for this change to lead to long-term stabilization of the housing market, various policies are needed, particularly macroprudential policies to control demand, along with supply policies and tax measures. Ultimately, if everyone continues to move only to Seoul, the problem will not be solved no matter how many homes are built. I believe that alleviating the concentration in the greater Seoul area is necessary to resolve this issue. Rather than seeking a quick fix, policies must be implemented very consistently over a long period. Household loans via real estate lending have increased so much that they have reached a level that threatens our financial stability, so household loans and mortgage loans need to be reduced. The concentration of funds in real estate is not desirable for our country's long-term development, and from the perspective of tax fairness, if real estate taxes are lower than taxes in other areas, the concentration of funds cannot be resolved, so comprehensive efforts must continue.

-The exchange rate has fallen to around 1,420 won, a lower level than when it was above the 1,480-won range at the end of last year, but volatility remains high. At the current level, can we say that the burden of a high exchange rate has been partly eased, or should we still focus on volatility? What factors have caused the exchange rate to fall in level even as foreigners have been net sellers in the stock market recently?

▶I am concerned that this might sound like I am blaming someone. When the exchange rate was in the 1,480-won range and talk emerged that it would break above 1,500 won and that the Korean currency would become worthless, I felt very uncomfortable. Not only I, but also many financial institutions and even the U.S. Treasury Department, said that "that level is inconsistent with Korea's fundamentals," indicating that it had deviated significantly. Looking back at last year's statistics, we can now see that domestic residents' overseas investments last year increased to about three times their previous level. In particular, the increase was concentrated in October and November, and especially individual investors' overseas investments grew rapidly. If you include exchange-traded fund (ETF) investments, individual investors' overseas investments were larger than those of the National Pension Service. I am not assigning blame, and there are certainly many underlying reasons and backgrounds, but as domestic residents' overseas investments increased, expectations that the exchange rate would rise into the 1,500-won range helped drive the exchange rate higher.

▲Interpreting the current downward phase, I believe that the announcement a few weeks ago by the National Pension Service that "this year we will reduce overseas investments by more than 20 billion dollars" and that "we will hedge exchange rates and invest overseas more flexibly" has made a major contribution. Expectations for further exchange rate increases have diminished, and in recent weeks, companies have also begun selling the dollars they were holding. Currently, capital outflows from overseas investments by the National Pension Service have decreased significantly, but individual investors' overseas investments in January and February have been leaving at roughly the same pace as the very high levels seen in October and November last year. So that issue has not yet been resolved. Over the past few weeks, however, we are seeing signs that the outflows from individual investors are somewhat moderating. In a sense, the current situation suggests that supply and demand factors are improving somewhat.

▲Foreigners' stock investments were very large last year. Especially early last year and in the first half of the year, when stock prices around the world rose sharply, our market alone struggled to rise. At that time, foreigners bought a lot of Korean stocks. However, from the end of last year, when stock prices began to climb, and particularly in January and February this year, there were significant outflows of foreign investment from those stocks. Since the prices of the stocks they bought last year have risen considerably, I think they are now moving to realize profits. If our market becomes more solid and attractive, for example by being included in the MSCI Developed Markets Index, there could be additional inflows.

▲As Korean stock prices have risen, foreign investors have begun to hedge as part of their risk management. This is one reason why our exchange rate did not fall quickly in January and February. In the process of hedging to lock in some of their profits, dollar demand increased, pushing the exchange rate upward. Our domestic investors, when they invest overseas, do so almost entirely without hedging. They tend to view hedging as a loss or a cost, but once you have earned a certain level of return, it is very important to hedge and realize those gains. From a risk management perspective, I believe we still have things to learn from foreign investors.

-What was the reason for starting to publish the six-month interest rate outlook in dot-plot form from this month, why was the number of dots per member set at three, and why was the Governor also required to place dots? In the case of the U.S. Federal Reserve (Fed), each member has his or her own research staff, whereas at the Bank of Korea all Monetary Policy Committee members look at the same Bank of Korea data, so some argue that a dot plot is meaningless.

▲Since taking office, I have been presenting quarterly forecasts for three years. There were some shortcomings in communication with the market about the quarterly forecasts, which is part of why the change was delayed. Recently, however, the notion that these are conditional forecasts has taken hold, even if they turn out to be wrong. We have now decided to improve our communication by using this dot plot, which extends beyond six months, based on those quarterly forecasts. We have not yet extended it to one year because one year in Korea seems equivalent to about three years in other countries. To cover this uncertainty, I believe we need to accumulate data, test it, and communicate with the market before proceeding. Also, since this is something we have been preparing for three years since I became Governor of the Bank of Korea, it would be hard to deny that the thought that "it would be good to complete this before leaving office" played some role. If each member placed only one dot, the market would likely try to figure out which dot is the Governor's, but if each member places three dots, I thought they would not try to find it. This is because, although the Governor is just one of the Monetary Policy Committee members, there is a perception that the Governor's opinion carries significant weight. Another advantage of placing three dots is that it allows us to show a probability distribution.

▲The Fed has regional Federal Reserve Banks, so each member has his or her own staff and they compete with different forecast distributions. By contrast, compared with the U.S., our country is much smaller in scale. The Monetary Policy Committee members place their dots based on the economic outlook projected by the Bank of Korea's staff, reflecting how much they agree with it. Thus, we see this as an opportunity for each member of the Monetary Policy Committee to express differing views on the staff's projections.

-Going forward, which variables should be watched most closely in gauging the direction of monetary policy? Please explain in more detail the degree of polarization related to the stock market.

▲Regarding the exchange rate and the real estate market, it is still not a stage where we can be fully at ease. We are making significant efforts to adjust domestic supply and demand factors. However, the exchange rate is influenced not only by domestic factors but also by external factors such as the impact of AI-related stocks in the U.S., the effects of the U.S. Supreme Court's tariff ruling, and concerns about Japan's fiscal policy. Therefore, it is a bit too early to be relaxed about the exchange rate. As for real estate, although the government is making considerable efforts, we still need to wait and see whether the real estate market will stabilize quickly. Considerations related not only to inflation but also to financial stability will continue for a considerable period. While inflation looks relatively manageable, we do not know how it will move depending on oil prices and the exchange rate.We will basically look at inflation first, then financial stability, and then growth, and adjust policy accordingly.

▲As for polarization, as I keep emphasizing, the Bank of Korea is concerned about polarization and is putting forward policy recommendations through its series on structural reforms, which discusses how to address it over the medium to long term. However, it is very difficult to solve the problem of polarization with interest rate policy alone. Unfortunately, the likelihood that polarization will deepen in our country has increased. As you can see, economic growth is being driven by IT, while non-IT sectors are growing at about 1.4%, which is far below the potential growth rate, as I mentioned earlier. Thus, the gap between IT and non-IT sectors will widen significantly by industry. In addition, since a substantial portion of our stocks is owned by higher-income earners and institutions, the degree to which people benefit from rising stock prices differs by income level, which will contribute to polarization. Polarization arising from technological advances such as AI is also likely to become a serious social issue. We need to prepare for polarization through fiscal policy and structural reforms.

▲The recent rise in stock prices is quite positive in that, in addition to the government's efforts to improve capital market systems, improvements in earnings across various sectors such as semiconductors, defense, nuclear power, and securities have supported a step-up in the level of the domestic stock market from an undervalued state. However, given that the speed of this stock price increase has been exceptionally rapid by global standards, volatility could expand sharply if internal or external shocks occur. In the process, if leverage (borrowed investing) increases substantially, this will make the market more vulnerable to volatility.

-What are your expectations regarding the National Pension Service's plan to issue foreign-currency bonds, and is the six-month interest rate outlook in dot-plot form likely to be maintained?

▲Issuing foreign-currency bonds has a natural hedging effect, but it also carries the burden of increasing national debt. There is also the question of where to invest the additional won-denominated assets that are created as a result. Whether the six-month interest rate outlook will become firmly established ultimately depends on market evaluation. If the market accepts the conditional outlook as useful information, the system can take root in a stable manner. If the Bank of Korea, which has a great deal of information, refrains from saying anything for fear of criticism, the market would be moving without traffic lights. I believe the Bank of Korea should play the role of those traffic lights. Regardless of who serves as Monetary Policy Committee members, I hope the system will continue.