![[일문일답] Lee Joo-yeol pulls out warning letter of’debt struggle’](https://image.chosun.com/sitedata/image/202101/15/2021011501476_0.jpg "[일문일답] Lee Joo-yeol pulls out warning letter of’debt struggle’")
“It is too early to mention the change of policy stance… Liquidity support continues”
Bank of Korea governor Lee Ju-yeol drew a line on the possibility of a shift in monetary policy, including an interest rate hike. It is said that there is still high uncertainty in the real economic conditions, so it is necessary to support this with an easing monetary policy.
It also announced that it will maintain liquidity measures taken after the outbreak of the novel coronavirus infection (Corona 19) for the time being. However, they repeatedly expressed concern about the rapid rise in real estate and stock prices and’debt investments’ due to a surge in liquidity.
Governor Lee said at a briefing session on the direction of monetary policy held at the main building in Sejong-daero in Seoul on the morning of the 15th, “Considering the real economic conditions, it is not a matter to consider normalizing various measures or changing the stance of interest rate policy. It’s still too early to mention.”
On this day, the Bank of Korea’s Financial Services Commission unanimously decided to freeze the base rate by 0.50%. Although the domestic economy is showing a modest recovery due to strong exports, it takes into account the fact that economic uncertainty remains high depending on the development of Corona 19.
Governor Lee said, “The risk of the vulnerable class is difficult to be resolved in a short period of time due to the high uncertainty of the economic recovery.” “I don’t think it’s a bit of a hasty picking up support.”
He said, “The increase in asset prices is a little faster in the light of the real economy and income conditions, and borrowings are increasing significantly in the process,” he said. “Investors can tolerate the expansion of investments based on excessive leverage due to an unexpected shock. “We are concerned that it can cause a difficult level of loss.”
The following are questions and answers with Governor Lee.
-The third wave of Corona 19 spreading continues. How much do you think the impact will have on the economic growth rate in the fourth quarter of last year and the first quarter of this year?
“As the third coronavirus spread is prolonged, consumption is showing a more sluggish appearance than when it was forecast in November of last year. The degree of shock is likely to be much greater than that of the previous spread. As it is showing a trend, the overall growth rate forecast is not expected to differ much from that of last November.”
-The government’s COVID-19 vaccination plan is being materialized. What is the difference from the vaccine introduction scenario assumed when forecasting the economy this year?
“Overseas, domestic, and the vaccination timing was about a quarter ahead of the forecast at the time. In the case of major developed countries, vaccination was expected to begin only this year, but in the UK and the United States, vaccination has already begun. In Korea, vaccination has not started until the middle of this year. I thought this would start, but I know that the government is aiming to start vaccination from next month. The government is going to announce a vaccination plan soon, and we will take this into account and look at the economic trends.”
-With the recent surge in the KOSPI index, it is pointed out that it is a bubble. Comments on this.
“The KOSPI index is soaring day by day, and it is difficult to determine in advance whether the uptrend is a bubble or not. However, the rate of increase is very fast compared to before, and I am concerned that this speeding can greatly shake even with a small impact. For example, major countries If there is a shock such as a sudden change in monetary policy, a geopolitical risk that is difficult to predict in advance, the spread of Corona 19 becomes steeper, and the supply of vaccines is disrupted, there is a possibility that the stock price will be adjusted as market participants’ expectations change. If the stock price is adjusted sharply, it is a situation that pays close attention to the market anxiety and the like.”
-There is an expression’reinforcement of risk-seeking propensity’ on this visit. Do you think it is overheating enough to harm Korea’s financial stability in a short period of time?
“We are constantly stress-testing how external shocks, such as asset price adjustments, will affect our current financial system, even if there are some adjustments in asset prices, we are not in a situation where we are concerned about the overall safety of our financial system.”
-Household loans increased by 100 trillion won last year. It is increasing rapidly since the Corona 19 incident, but do you think there is no risk of household loans becoming insolvent? Are you preparing an alternative at the central bank level?
“Household debt increased significantly last year, but this was an inevitable aspect in the process of responding to Corona 19. However, our household debt level was already at a high level before the Corona 19 incident, and the rate of increase in household debt last year along with the rise in house prices Since it has grown considerably steeper, we cannot help but worry about the risk of household insolvency, but at this point, it is unlikely that household debt will increase further. It can’t be solved. We have to work with the macroprudential supervisory authority and the government. We are looking for a management plan with the relevant ministries.”
-Following real estate, the stock market is also focusing on assets. As the stock price continues to hit an all-time high, individual investors are increasingly using credit to enter. How do you rate this?
“In the so-called media, the expression’debt investment’ is used, but investment expansion based on excessive leverage is concerned that, in the event of an unexpected shock and price adjustment, it may cause a level of loss that is difficult for investors to bear. Because of the problem of choice and so-called leverage, investments made are always carefully watched, and I think investors should always keep this possibility in mind. We are always paying attention to the flow of funds to the market and the financial imbalance.”
-Recently, the discussion about tapering in the United States is hot. It is observed that Korea, which has a fast economic recovery, may have a faster exit strategy than the United States. Is there a possibility that the exit strategy will be realized within this year?
“Considering the real economic conditions, changing the stance of interest rate policy or normalizing various easing measures is not to be considered at present. Remarks on the change of stance are still too early. At present, the difficulties for the vulnerable groups of small business owners and self-employed people are quite large and the future economic recovery will be recovering There is a lot of uncertainty in the current situation, too.. The risk of the victims is difficult to be resolved in a short period of time. The Federal Reserve’s policy is a major factor for us to consider, but it does not always match us. Depending on the circumstances and circumstances in which the policy is inevitably different from country to country. We will also determine the policy tone according to our situation.”
-There is an analysis that the longevity of marginalized companies and delayed exit due to liquidity support for companies in the corona crisis situation have adverse effects on the macroeconomic level. At what point do you think the BOK’s direct and indirect support for corporate liquidity should be completed?
“Liquidity support measures are not intended to support marginal companies, but focus on easing financing difficulties for companies with temporary liquidity shortages. Through this, the aim is to prevent financial market instability and economic contraction, and it is considered to have had considerable effect. It is a natural point that prolonged support may lead to side effects such as lifespan of marginalized companies.If the expiration of temporary support measures arrives, we will examine the effects and side effects together to decide whether to end the face-to-face service industry due to the re-proliferation of corona. It is quite sluggish and the difficulties of the small business owners, self-employed and temporary workers who are engaged there are great, so I don’t think they should pick up the application hastily.”
-Last year, the Bank of Korea implemented emergency measures related to liquidity supply to stabilize the financial market following Corona 19. Some of the emergency measures ended last year, but a significant portion of them are in effect. Given the current financial market situation, what is your opinion on whether the remaining emergency measures related to financial market support should be terminated?
“The financial market has stabilized, but it is pointed out that liquidity management is necessary because asset prices are rising, and we are concerned that asset prices are rising rapidly and borrowings are greatly increasing in the process in light of the overall real economy and income conditions. However, resolving the measures taken now too prematurely. There may be another burden. When the expiration of the current measures arrives, I will decide whether to end it by closely supplementing the effects and side effects of the extension prior to that.”
-There is a discussion on the 4th disaster subsidy payment in the politics, and controversy over the selection and universal payment method is being repeated. Which method is appropriate when considering the economic situation?
“In the current situation, we believe that selective support is more appropriate. As the Corona 19 incident is prolonged than expected, we need to consider how to efficiently use limited resources, but it is effective to apply to the difficult class, such as the low-income class, small businesses with concentrated corona damage. As a result The speed of economic recovery is also faster, and it is consistent in terms of efficient management of resources. Selective payment is reasonable.”
-As long as the spread of the corona continues, it is unlikely that interest rates will be easily touched. What kind of policy efforts do you think is necessary in terms of not only monetary policy but also the whole-of-government in order to move the money gained to the real economy?
“How to induce the released liquidity into a productive sector is a very fundamental issue, and I think that it requires the same efforts of all economic actors as well as the government. But the most important thing is to promote business activities to enhance the economic environment and profitability of companies. It is a way to improve and promote corporate activities.”
-Long and short-term KTB spreads such as 3-year/10-year spreads are wider than previous years. Do you think the shape of the current yield curve is natural?
“It is true that the long- and short-term interest rate gap has widened. However, the recent rise in domestic long-term interest rates is that there are boundaries on the supply and demand of bonds, but market participants’ expectations of the direction of economic policies that major countries will implement in the future and how they will affect the economy and inflation. It is a phenomenon in common with major countries, such as whether the current long- and short-term interest rate difference is appropriate or how well the yield curve is valid, etc. What is the background cause of the long- and short-term interest rate difference, and how the financial economy is at home and abroad? It’s a matter to put together and judge.”
-The BOK’s annual plan, when necessary, mentioned the review of the size of government bond purchases and the pre-announcement of the plan, which attracted attention in the bond market. How far are the plans prepared, and what specific situations need to be disclosed in advance?
“It is true that domestic bond supply and demand conditions have the potential to act as a pressure to increase interest rates. We are well aware of that, and we believe that there is a good possibility that interest rate volatility will increase. The policy to promote market stability is firm, and in that case, We will always prepare various measures beyond the simple purchase of KTBs to promote market stability.”
-In China, the issuance of central bank digital currency (CBDC) is close, and the US Monetary Authority is actively responding. It is pointed out that the BOK should also speed up the development of the CBDC. Please tell us about the current state of preparation for the CBDC and plans for the future.
“In the case of Korea, the need for CBDC issuance in the near future is not great because the payment and settlement service market is well developed. However, in preparation for the possibility that the payment and settlement environment will change quickly and the need for CBDC issuance will increase accordingly, the CBDC study was in full swing. Major countries, such as the United States, Europe, and Japan, are not at all different in their position, and they are not likely to use it right away, but that they will do related research. This year, we will build a pilot system in a virtual environment to test performance and safety issues, etc. I think CBDC-related research is faster than major countries. And will actively participate in joint research in the future.”
-As exports account for a large portion of the Korean economic structure, there is a lot of interest in the appreciation of the won. A large current account surplus will continue this year. How do you see the possibility of the won’s appreciation per dollar in the future?
“If a current account surplus occurs, it can act as an appreciation pressure for the currency, and the effects on the exchange rate are so diverse. There is a current account surplus, but there is also an effect on foreign investment by domestic investors. In fact, the direction of the exchange rate is mentioned by the central bank governor. Is not appropriate.”