As analyses emerge that Korea could fall into a structurally prolonged slump due to ultra-low birthrates and aging, reaching the effective lower bound of the policy rate, Bank of Korea Governor Lee Chang-yong said bank-intermediated lending and a Korea-style dot plot could serve as useful policy tools.
On the 18th in Washington, D.C., at the International Monetary Fund (IMF)-hosted "Michel Camdessus Central Bank Lecture," Lee said, "When an emerging economy like Korea falls into a structurally prolonged slump and interest rates reach the effective lower bound, it is not desirable to use unconventional monetary policy," noting the above.
The effective lower bound refers to the floor at which further rate cuts have no effect. The Central Bank, upon reaching the effective lower bound, finds it difficult to stimulate the economy through rate adjustments alone and employs unconventional tools such as quantitative easing (QE) and negative interest rates.
He pointed out that Korea, a non-reserve-currency country, is not well positioned to undertake quantitative easing at the effective lower bound. Citing Switzerland's large-scale FXI (foreign exchange intervention) and Sweden's quantitative easing policy, he said, "Unlike those countries, the won is not a reserve currency and could trigger unintended risks," expressing concern about insolvency despite profits, trade disputes, and a contraction in the interbank market.
Lee also saw that quantitative easing could overheat the real estate market in Korea. He argued, "In Korea, quantitative easing would fuel a rise in real estate prices rather than support the real economy, further worsening an already severe low birthrate problem."
Lee introduced the funding-for-lending (FFL) scheme as effective. Under FFL, the Central Bank supplies funds to private financial institutions at low rates and guides them to extend loans to specific segments such as small and midsize enterprises or the self-employed. A representative example is the bank-intermediated lending support program.
Lee said, "In December last year, when martial law was unexpectedly declared, we held off on a rate cut and provided targeted support to the self-employed and small and midsize enterprises through FFL," adding that it is "a policy tool the Central Bank can additionally use."
Lee also said that the so-called Korea-style dot plot, "forward guidance" (a compilation of Monetary Policy Committee Commissioners' future rate projections), is useful. He said it is "a useful tool for strengthening communication with the market," adding, "It will serve as a channel to communicate the direction of monetary policy more proactively with the market under various environments."
Meanwhile, the Michel Camdessus Central Bank Lecture has been a venue since 2014 for the IMF to share insights with member Central Banks on global economic and financial issues. In central banking circles, it is regarded as one of the three major events along with the Federal Reserve's "Jackson Hole Economic Policy Symposium" and the European Central Bank (ECB) "Sintra Forum."