Bank of Korea Governor Lee Chang-yong refuted criticisms on the 23rd that the timing was missed for both the interest rate hike and cut cycles, emphasizing the need for monetary policy to comprehensively consider factors like inflation, foreign exchange, and household debt.
Governor Lee made these remarks during a keynote speech on the topic of 'Integrated Policy Framework: Application to Korean Monetary Policy' at the International Economics Association held at the University of Seoul in Dongdaemun-gu, Seoul that day.
Lee started by noting, "One of the criticisms over the last two and a half years is that the Bank of Korea, by considering factors beyond the inflation stability target, such as exchange rates, household debt, and real estate prices, missed the timing for rate hikes and cuts."
He said, "Since the 2010s, after experiencing the global financial crisis, international organizations such as the International Monetary Fund (IMF) and Bank for International Settlements (BIS) have increasingly viewed adopting an Integrated Policy Framework (IPF) as more desirable for emerging markets without reserve currencies," and noted that the IMF has also begun to positively assess interventions in the foreign exchange market, which it had not previously acknowledged.
Governor Lee pointed to the latter half of 2022, during the interest rate hike period, and August this year, when the base rate was held steady, as times when the integrated policy was applied. The latter half of 2022 was a period of conflict between inflation and financial stability goals, as inflation surged and short-term financial market instability was triggered, centering on real estate project financing (PF). Concerns about the external institutional sector also grew as the won-dollar exchange rate exceeded 1,400 won.
The Bank of Korea responded to the price and exchange rate hikes by raising the base rate by 0.5 percentage points in October of that year, while also expanding reverse purchase agreement (RP) purchases to supply funds to the short-term financial market. Governor Lee explained, "These were temporary, partial measures that did not conflict with the overall currency tightening direction," and noted, "Collateral was secured and high interest rates applied in the process, aligning with the principle of preventing the fiscalization of monetary policy."
Financial instability was also at the heart of the decision to keep the base rate unchanged in August this year, despite strong demands for a cut. At that time, the Monetary Policy Committee decided to hold the rate, despite conditions for a rate cut arising in the real sector, with inflation and private consumption considerations, as concerns arose that a cut could spur rises in real estate prices and expand financial imbalances, prompting the government to first strengthen macroprudential policies and await their effects.
Governor Lee emphasized, "Expectations for a pivot in currency policy by the U.S. Federal Reserve (Fed) have led domestic market interest rates to fall significantly even before the Bank of Korea's base rate cut began. Consequently, since August, household debt and housing prices have surged, increasing financial imbalances."
In conclusion, he stated, "While the Bank of Korea has adopted inflation targeting as its operational framework, there are significant limitations to achieving both price and financial stability solely through monetary policy due to constraints faced by non-reserve currency countries," and added, "Moving forward, the bank will pursue price stability as a primary policy goal while utilizing various tools under the integrated policy framework to also promote financial stability and alleviate foreign exchange market volatility."