Bank of Korea Governor Lee Chang-yong said on the 29th, "It seems we need to have many discussions with the new government," adding, "I hope a consensus can be formed regarding the proportion of household debt to gross domestic product (GDP) and the issue of monetary policy stimulating the real estate market in specific regions."
Following a press conference after the Monetary Policy Committee meeting that day, the governor noted, "Currently, the liquidity is sufficient, and if we further lower interest rates, there is a high possibility that liquidity will flow into the housing and asset markets, repeating the mistakes made during the COVID-19 period."
The governor's remarks seem to emphasize that an accommodative monetary policy could act as a catalyst for rising housing prices in the metropolitan area. During the COVID-19 outbreak, central banks around the world competitively lowered interest rates, leading to a sharp increase in the money supply, which had previously driven up housing prices in the metropolitan area.
The governor explained that the 0.25 percentage point reduction in the base interest rate that day was also a measure taken to consider financial stability. He said, "If the base interest rate is lowered further from 2.50% annually, it is more likely to lead to rising asset prices than to recover real economic activity like corporate investments. This is something we have already experienced during the COVID period."
He pointed out that the new government's immediate task is "economic stimulus." According to the revised economic outlook announced by the Bank of Korea that day, this year's growth rate forecast for Korea is 0.8%. It is the first time since the 2008 global financial crisis that Korea's growth rate has fallen below 1%, excluding the COVID-19 outbreak.
The governor particularly noted that due to low birth rates and an aging population, Korea's potential growth rate has deteriorated, increasing the probability of economic contraction compared to the past. He mentioned, "In the 2008 global financial crisis, the potential growth rate was maintained at around 3%, but now, due to structural reasons, the growth rate is falling below 2%," adding, "The probability of our economy contracting has soared from 5% to 14%."
The reciprocal tariff policy of the United States is also a reason why a slowdown in growth is expected. The governor believes that when U.S. tariff policies are fully implemented, it will worsen the contribution of net exports (exports minus imports), which had been a pillar of economic growth. Specifically, he said, "This year's growth rate forecast of 0.8% is entirely contributed by domestic demand at 0.8 percentage points, while the contribution from net exports is projected at 0 percentage points," adding, "Next year, when the effects of tariffs materialize, the contribution from net exports is expected to worsen to -0.3 percentage points."
However, he indicated that there is a possibility of improving growth rates if a second supplementary budget is pursued. The governor mentioned that only the expected effects of the first supplementary budget were reflected in this year's growth rate forecast, stating, "There are both upside and downside risks in the 0.8% growth rate projection. We also need to consider the effects of the new government's fiscal policy and the interest rate reduction cycle."
However, he emphasized that the new government should not make the mistake of stimulating the real estate market for economic stimulus. The governor said, "The factor that has held back economic growth for the past two years is construction investment, which was due to excessive investment during the better years of the real estate market," adding, "There can be calls to lower interest rates to assist construction companies due to poor construction, but the important task for the new government is to stimulate the economy without repeating the mistakes of the past."
On the other hand, regarding the recent sharp decline in exchange rates, he explained, "It's a process of normalization of abnormality." The governor stated, "Over the past six months, the Korean won has depreciated significantly to the mid-1,400 won range due to political uncertainty relative to our economic conditions," adding, "Currently, I do not see a situation where political factors are influencing the exchange rate."
However, he stated that it is difficult to predict the future trend of exchange rates. He mentioned, "As it has become known that the U.S. government and several Asian countries are discussing tariffs, including exchange rates, investors' expectations are changing," adding, "Since the changes in exchange rates are largely due to expectations rather than accompanying physical movement, it is difficult to predict the direction."