Was BoK slow in lowering rate?

Governor dispels criticisms using IPF

In his keynote speech, the Governor of the Bank of Korea(BoK), Chang Yong Rhee, provided an argument against the criticisms on the recent Bank's policy move. Critics have argued that the Bank has been too hestitant in lowering policy rates, causing the economy to be sluggish.

In the KIEA annual conference held on December 23, Gov. Rhee said those policy decisions on question can well be explained through the lens of the Integrated Policy Framework(IPF). This was the first time that the Governor explained BoK’s monetary policy framework in public.

The IPF, recently developed by the IMF, provides a guidline for the countries like Korea on how to use the traditional interest rate policy with other policy tools including Capital Flow Management (CFM), Foreign Exchange Intervention (FXI), and Macroprudential Policy (MPP).

Gov. Rhee said that the reason why the BoK did not change the policy rates in August 2024 was due to financial stability concerns, the secondary mandate of the Bank. He said there was alreadly "over-anticipation" of a rate cut in the market "beyond what was intended" that led household debts and housing prices to rise rapidly, expanding financial imbalances.

Instead of a rate cut, the Bank implemented MPP to deal with financial imbalances in collaboration with the government. The main concern was that "the economy’s heavy reliance on real estate distorts resource allocation by expanding the credit supply to non-productive sectors like real estate, which could act as a constraint on consumption and growth in the medium to long term."

He said this policy move (the "pause" as he described) made it possible for the two consecutive rate cuts in the following decisions in September and November.

He concluded that "the BOK will continue to prioritize price stability as its main policy objective through inflation targeting, while combining a range of policy tools under an IPF to enhance financial stability and to mitigate any foreign exchange market volatility."

(Full script can be download here)