The Bank of Korea isn't an institution that adjusts interest rates or prices? Isn't structural reform something that the government or the National Assembly should handle?
On the 6th, the Bank of Korea published a post on its blog regarding structural reform, answering this question itself. It stated, "Structural reform directly affects currency policy," emphasizing the need for structural reform to ensure the effectiveness of interest rate policy. The blog post was written by Hwang In-do, the head of the financial and currency research department at the Bank of Korea, who has researched issues such as low birth rates and elderly poverty.
Hwang noted that if structural reforms are not carried out properly, the economic fundamentals would deteriorate, making it difficult to adjust interest rates. The Bank of Korea has already analyzed that since 1991, due to aging trends, real interest rates have fallen by about 1.4 percentage points.
The decline in the equilibrium interest rate in a super-aged society is due to changes in the structure of money demand and supply. Investment demand decreases, while households increase savings to prepare for retirement. When the demand for borrowing decreases and the supply of money through savings increases, the value of money falls, leading to a decline in interest rates.
The problem is that the lowered real interest rates reduce the operational capacity of currency policy. Even a slight reduction in the base interest rate brings it close to zero, thereby limiting the effectiveness of policy measures. Conversely, raising the base interest rate also becomes burdensome. As aging intensifies, welfare expenditure increases, making interest rate hikes impose a larger burden on government finances.
Hwang stated, "Structural reform is about strengthening the muscles of the economy, and that muscle is necessary for the tool of interest rates to have power," adding that "there needs to be reform addressing structural issues that weaken the economic fundamentals and narrow the space for effective currency policy to operate."
Meanwhile, this article comes roughly two months after Lee An-joo, a member of the Democratic Party of Korea, publicly criticized Bank of Korea Governor Lee Chang-yong on June 25, saying, "Be faithful to the original role of the Bank of Korea." At that time, Lee An-joo expressed discontent with the Bank of Korea raising its voice in areas unrelated to currency policy, such as care for foreign elderly and agricultural product imports, referring to it as "overstepping."