Regarding the inclusion of 'exchange rates' in the agenda of the 'July package' agreed upon in the South Korea-U.S. 2+2 trade talks, Lee Chang-yong, the governor of the Bank of Korea, evaluated it as 'not bad news' for South Korea.
During a meeting with reporters accompanying the Group of 20 (G20) finance ministers and central bank governors meeting held in Washington, D.C., on the 25th (local time), the governor said, 'The U.S. Department of the Treasury is a group of experts on exchange rates, just like our Ministry of Economy and Finance. If we discuss the exchange rate issue, it won't be bad to talk separately from the U.S. Department of the Treasury.'
He stated, 'If we look at the exchange rate without any thought about how much it has been devalued, the exchange rate of our country (the value of the won) has been devalued in recent months due to political and other issues. It is difficult to explain this, but if the U.S. Department of the Treasury and our Ministry of Economy and Finance discuss it, it allows for a professional conversation independent of politics.'
He added, 'Economists don't understand the nature of exchange rates well; politicians in particular are not aware of it. Given that the exchange rate is an issue that is easy to politicize, it is better for experts to discuss it among themselves.'
Regarding the outcome of the South Korea-U.S. 2+2 trade talks, he commented, 'The framework, structure, and format of the negotiations have emerged, which is fortunate as it reduces uncertainty.' He noted, 'From the U.S. perspective, they had discussions with other countries, and I've heard that South Korea brought good proposals. I see a positive aspect in this. However, we need to observe how positive it is.'
He stated, 'The two countries understood each other's timing and negotiation methods. The U.S. reacted positively to South Korea's proposals. We have internal procedures, so I sought the understanding of the U.S. side to finalize the agreement in July.' He added, 'These three elements are the key.'
Regarding the impact of U.S. tariff policy on the domestic economy, he noted, 'Our economy can cool down more quickly due to the tariff shock now,' stating that 'the economy or exchange rate is an issue.'
Concerning the impact of U.S. tariff policy on prices, he said, 'Neither we nor other countries will raise tariffs' and added, 'I believe prices have stabilized around 2%.' He continued, 'Rather, the problem is that items that cannot be sold to the U.S. are coming in at lower prices,' and, 'Oil prices have dropped significantly. I don't think concerns about prices are significant except for the U.S.'
◇ 'First-quarter GDP growth rate worse than expected'... hints at interest rate cuts
In response to the question, 'Will the growth rate forecast be drastically adjusted in the economic outlook for May to reflect the negative growth in the first quarter?' He replied, 'At the April monetary policy committee meeting, we internally anticipated first-quarter growth to hover around 0%. If it turns negative, we were thinking about -0.1%, but it seems to have come out worse.' He added, 'This mechanically lowers the annual growth rate.'
The governor continued, 'There is a high possibility that the impact of the tariff shock will also work negatively in the future,' stating, 'It is difficult to discuss right now as the tariff situation has changed significantly in the last few days.' He mentioned, 'We do not know how much can be covered by the budget, and we will take these factors into account when preparing the new economic outlook in May.'
Regarding future monetary policy, he expressed, 'The interest rate is currently stable, so we can say we are in a 'trend of interest rate cuts.' He noted, 'Ultimately, how much to lower it and at what pace will be decided based on financial market conditions and the economic situation.' He added, 'It may sound like we aren't lowering the base rate, but we actually are.'
In response to the view that 'to stimulate the economy, the pace of interest rate cuts should be increased,' he said, 'We have already cut it three times. In that context, uncertainty has increased significantly.' He added, 'In such a situation, can we just rush without thinking?' He continued, 'We are just adjusting the speed, but that doesn't mean we are not lowering it.' He remarked, 'The Central Bank cannot only focus on growth. That's where the difference in perspective arises.'
When asked, 'Do you think the government's proposed supplementary budget of 12 trillion won is sufficient?' he replied, 'For the time being, I will not talk about finances. We will accept the finances and return to the direction of our monetary policy accordingly.'
The governor stated, 'At the beginning of the year, right after the emergency decree, I spoke exceptionally about the supplementary budget.' He explained, 'Many institutions make economic forecasts, but if there is not quick communication about financial expansion plans, I feared that the growth rate forecast would drop significantly, so I mentioned that a supplementary budget is necessary. If both ruling and opposition parties announce the supplementary budget together, it gives the perception that the economy can operate properly regardless of political instability, which is why I raised the issue of the supplementary budget to prevent a downgrade in credit ratings.'
He said, 'We have now come to a period that can be considered normal,' arguing that 'once the government establishes fiscal policy, we should analyze its effects and decide how to approach interest rate policy.'
◇ 'Turning crisis into opportunity... South Korea has relied only on exports of certain industries'
The governor identified 'uncertainty' as the key theme for this year's International Monetary Fund (IMF) and World Bank (WB) annual meetings. He stated, 'Uncertainty was an important topic during this meeting,' explaining, 'The uncertainty regarding how U.S. tariff policy will develop in the future, as well as the uncertainty that emerged in the U.S. financial and bond markets and dollar movements after the announcement of reciprocal tariffs were discussed. Even if tariff negotiations make progress, discussions continued on whether these issues will return to normal or persist.'
He remarked, 'Despite such uncertainty, the financial markets showed many price fluctuations but operated well in terms of market functionality,' adding, 'The question is whether the markets will continue to function well in the future.' He mentioned, 'Compared to the past during the COVID-19 pandemic, the financial capacities of major countries have weakened significantly, and there were many discussions on what to do if another crisis arises under conditions where each country cannot loosen their financial policies.'
The governor noted, 'I was impressed by Europe's responses,' stating, 'In Europe, opinions were gathered that they should take this crisis as an opportunity to accelerate the restructuring of policies such as the 'Banking Union' that had been delayed in Europe.' He added, 'The EU should seize the crisis as an opportunity for restructuring, and so should we,' adding, 'South Korea has relied too much on exports until now. The structure is based on reliance on exports from only a few industries.'
The governor emphasized, 'We should take this opportunity to stimulate domestic demand,' explaining, 'If the structure had not been reliant on the exports of certain industries, we would not be in this situation. We have not changed this for decades. The notion of taking a crisis as an opportunity applies not only to Europe but to us as well.'