Rate cuts not cure-all for slow demand, high interest: BOK chief

Bank of Korea Gov. Rhee Chang-yong conceded that the central bank's recent rate cut would not reign in market interest rates but said that this is only the beginning for the BOK.

Bank of Korea (BOK) Gov. Rhee Chang-yong speaks during a parliamentary audit held at the central bank's headquarters in central Seoul on Monday. [BOK]

Rate cuts cannot be “a cure-all” for the economic challenges facing Korea, said Bank of Korea (BOK) Gov. Rhee Chang-yong, once again calling for a structural overhaul in order to fundamentally drive the country’s slowing growth potential.

The central bank chief also acknowledged that the latest 25-basis-point cut in the key interest rate would have only a limited impact on market interest rates, while suggesting that the effect of cuts on domestic demand would become apparent in a year.

The comments came during a parliamentary audit by the Strategy and Finance Committee of the BOK held at the central bank’s headquarters in Jung District, central Seoul, on Monday, as Rhee faced questions from lawmakers over the government’s controversial loan policies and the latest rate cut decision.

During the session, Democratic Party (DP) Rep. Kim Young-whan pointed out that “the diverging growth of exports and domestic demand has reduced the relevance between the two,” saying rate cuts alone cannot solve every economic issue, to which the governor responded, “It is true that lowering the base interest rate cannot be a cure-all."

“Rate cuts can certainly play a role, but I believe we need to look into various structural factors,” said Rhee, adding that “the BOK’s papers on structural reforms have been discussing relevant issues.”

Addressing a question by DP Rep. Ahn Do-geol suggesting that the key interest rate cut would not be able to bring down market interest rates, Rhee admitted that “it is difficult to deny [that point],” saying that “we could not predict the exact timing of a rise in real estate prices and household debt because stabilizing the project financing situation had been the top priority during the Meetings on Macroeconomic and Financial Stability [attended by senior economic officials] in the first half of the year."

Despite the criticism over the discrepancy between the government’s confusing loan-curbing policies and the BOK’s rate cut decision, however, Rhee said that “given that the proportion of loans related to properties is excessively large at banks, I think that an increase in mortgage interest rates is inevitable.”

Nevertheless, Rhee refuted criticisms that the rate cut was too late, citing the rapid increase in household debt over the past few months. The governor expects the effect of the latest rate cut to become visible about a year later.

“Only a single rate cut would not have much impact” on driving private consumption, said Rhee, adding that “we have just begun a monetary policy pivot, so its impact on driving domestic demand will depend on the pace of additional cuts in the future.”

The BOK chief projected that private consumption would rebound in the near future, fueled by slowing inflation and incentive payouts at major companies, while construction investment will remain sluggish for a while.

During the audit, DP Rep. Chung Il-young argued that the Monetary Policy Board members are being overcompensated, comparing the BOK's performance with elaborate economic projections and policy proposals devised by ChatGPT in mere seconds.

Rhee strongly refuted the implication that AI may replace the Monetary Policy Board, saying “ChatGPT suggested the key interest rate should be frozen in October when I used it — considering that the BOK decided to lower the rate, ChatGPT cannot be trusted.”

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]