Bank of Korea Governor Rhee Chang-yong, “It’s hard to say that we’ll lower the base interest rate this year.”

Bank of Korea Governor Rhee Chang-yong gives a lecture on global economic trends and corporate responses to such trends at the Korea Chamber of Commerce and Industry (KCCI) Jeju Forum on July 14. Courtesy of the KCCI

“It’s hard to say we’ll lower it (interest rate) this year.”

Bank of Korea Governor Rhee Chang-yong made the comment, while giving a lecture on global economic trends and ways for businesses to respond at the Korea Chamber of Commerce and Industry (KCCI) Jeju Forum on July 14. He mentioned that the United States could raise the base rate two more times and added, “If we lower our rate, it will further widen the gap, and I’m concerned about what it can do to the foreign exchange market.”

He mentioned that household debt increased in the last three months since the inflation rate dropped and explained that in the long term household debt could be a heavy burden. He said, “It (base interest rate) may not climb at a fast rate, but we need to think carefully about raising or lowering it.”

Earlier in a meeting to determine the direction of the nation’s monetary policy Thursday, the Monetary Policy Board decided to freeze the interest rate at 3.5%.

Consumer prices rose by 2.7% last month, but Rhee expected prices to climb again after August to a rate around 3% by the end of the year. He said, “Our target is about 2%, but if we start lowering the interest rate in this situation, it could be dangerous with the monetary policy swaying between hawkish and dovish and the entire macroeconomic system at risk.”

However, the central bank governor expressed his relief at stabilizing prices in the U.S. Rhee said, “Fortunately, the inflation in the U.S. began to rapidly slow down recording 3% (last month’s inflation rate YoY) two days ago,” and added, “The exchange rate has dropped significantly, and the global mood seems to suggest that perhaps it is the end (of high inflation).”

Rhee expected the economy to rebound in the second half of this year, yet argued that the speed would depend on the growth of the Chinese economy and the recovery of the domestic semiconductor industry. He said, “Right now, it may be a matter of speed, but we expect the economy to rebound,” and explained, “There is still a lot of uncertainty in the Chinese economy, and they say the price of semiconductors can drop no further, but depending on the situation in these areas, the economy could grow faster than expected.”

Although conflicts between the U.S. and China have had some impact on the decline in exports to China, Rhee pointed out that South Korea enjoyed the massive Chinese market for over a decade and neglected to restructure its industries.

The Bank of Korea governor said, “Exports to China began declining in 2017,” and argued, “We have become so used to this big market called China that we failed to realize that China could be chasing us when we were after Japan.”

“When there are a lot of electric vehicles, it requires restructuring. How are the SMEs linked to internal combustion engines in the supply chain going to make the transition? What will become of the repair workers?” The governor argued that restructuring was necessary to drive the growth of new changes and called for concerned parties to change their thoughts.

Rhee also spoke about concerns that South Korea could be following in the footsteps of Japan into a long recession. He said, “Given that Japan is a highly aging economy, we are very likely to follow their example. We are aging at a faster rate than Japan.”

He explained, “Japan enjoyed a huge current account surplus from the 1970s until the bubble burst in the 1990s and during that time made large investments overseas.” He said, “We claim to have caught up with Japan, but that is only in terms of income. When we look at the property we own, Japan has much more. The senior citizens in Japan are well off, but in our case, the elderly are likely to have little money.”