“The BOK now enjoys its full-fledged independence in terms of conducting monetary policy” – Interview with Kyuil Chung, Deputy Governor, Bank of Korea

Can you detect any traceable changes in the role and significance of central banks in national economies – and, particularly, that of BOK in Korean economy?

The role and significance of the Bank of Korea (hereinafter BOK) within the Korean economy has changed considerably since Korea experienced two huge economic hardships. Before the Asian Financial Crisis (1997-1998), the BOK had been empowered with two legal mandates: pursue stability of the monetary value and develop a sound banking and credit system. However, at that time, the minister of economy and finance also held the chairmanship of the Monetary Policy Board, and his main role was described as being the power of the chairman of the board with his casting vote. Even though the governor of the BOK represented the BOK and controlled most of the businesses vested in the BOK, the central bank’s independence was not fully guaranteed in legal terms. This was a kind of leftover legacy that originated during the era of government-led economic development.

Following the Asian Financial Crisis, institutional reforms to upgrade the operational structure of the Korean economy were undertaken across every sector of the economy. In a revised BOK Act, price stability was given as the sole mandate, while the BOK’s banking supervisory power was transferred to new financial supervisory organizations. This was accompanied by a change in the chairmanship of the Monetary Policy Board to the governor of the BOK in order to enhance the independence of the central bank. Consequently, the inflation rate markedly declined over the 2000s.

The Global Financial Crisis (2007-2008) led policy makers and the public alike to realize the importance of financial stability. Accordingly, financial stability was added as one of the BOK’s mandates. Though macroprudential policy is in the hands of the Financial Services Commission, the BOK publishes its Financial Stability Report biannually, and submits it to the National Assembly. I think the BOK now enjoys its full-fledged independence in terms of conducting monetary policy.

In addition to a legal mandate for monetary policy, the BOK also undertakes various related functions as the central bank. It operates and oversees the payment and settlement systems, manages national foreign reserves, compiles statistics & conducts economic research, and provides economic, financial and monetary education, among other things.

The membership of Mr Lee Juyeol in the Board of Directors of BIS since last year is seen by many as clear sign of the growing importance of Asian markets in the world economy. How would you evaluate Korea’s weight globally?

Mr. Juyeol Lee is the first Korean central bank governor to take a seat on the Board of Directors at the BIS since Korea joined the BIS in 1997. This appointment is in recognition of his personal contributions to BIS activities and governance since 2014, and also reflects the important role played by Korea in the global economy.

In 2018, Korea’s nominal GDP ranked 12th in the World Bank’s global GDP rankings. In the same year, the total value of Korea’s exports and imports came in at eighth in the U.N.’s global Comtrade rankings. Thus, in 2017 Korea became the seventh country to join the so-called “30-50 Club,” referring to countries that have a per capita Gross National Income (GNI) of more than USD 30,000 and a population of more than 50 million people, following the U.S., Japan, Germany, the U.K., France and Italy. Korea achieved this remarkable economic growth largely due to the success of its top export industries, including semiconductors, automobiles and shipbuilding, amid fierce global competition.

In addition, based on its holding of the ninth-largest foreign currency reserves in the world (USD 407.5 billion, as of November 2019), and its robust fiscal sustainability, the sovereign credit rating for Korea has hit the AA level (S&P global ratings), which is its historically highest record, without a single downgrade since 1997. This reflects the positive views that global rating agencies have regarding Korea’s economic fundamentals.

Lately, BOK decided on cutting the base rate to extreme low levels. Given that the Korean economy is largely dependent on its prime exporting sectors, can that be understood as a response to deepening China-US trade war?

The U.S.-China trade dispute has escalated further since the second half of 2018, especially in May 2019 when the scope of trade tensions was widened to include transactions with Huawei. These heightened uncertainties have resulted in a large deterioration in international trade, especially in the manufacturing sector.

The Korean economy has been affected by this uncertainty in two ways: weakened demand from China, and a delayed recovery in the global tech cycle. Considering Korea’s high dependency on semiconductor exports (21.4%, as of 2018) and on China-bound goods (26.8%, as of 2018) in its export composition, it is reasonable to say that heightened global uncertainty is the major cause of Korea’s downgraded growth rate, to around 2% this year, from 2.7% last year.

In the meantime, the U.S. Fed has adopted a policy of mid-cycle adjustments this year, cutting its policy rate as “insurance” against the elevated global uncertainty. The Fed’s moves have allowed emerging economies to secure some policy space without concern for widening interest rate differentials. Korea is no exception here. The BOK has also lowered its policy rate two times, from 1.75% to 1.50% in July and then to 1.25% in October, to alleviate the downward risks from economic sluggishness. That most recent policy decision saw the policy rate lowered back to its historic low.

GDP growth in Korea, just like in Hungary and many other European countries, is constrained by low birth rate vis-a-vis a rapidly ageing society. Thus, it would be of particular interest to know what measures and action plans are implemented by the Korean government to counteract these negative demographic tendencies?

With the lowest birth rate in the world (0.98, as of 2018) and a steady increase in life expectancy, Korea is undergoing a rapid demographic transition. With growing concern over the population ageing, which may undermine sustainable domestic growth, the Korean government has been promoting various policy responses to tackle the demographic issues, including the launch of a government-wide task force in April 2019.

First, the Korean government has been reviewing some measures to increase workforce participation, such as an expansion of incentives for the employment of elderly people, or the recruitment of skilled overseas personnel.

Second, the pending decline in the population of students and soldiers has prompted the government to examine improving its teacher “demand-supply” system and its military personnel recruiting system.

Third, the government plans to improve the quality of life for elderly people by, for example, activating housing pensions and retirement pensions, or by promoting housing policies for them.

Fourth, in compiling its long-term budget outlook, the government is actively reflecting the rapid demographic change, as well as the potential increase in social welfare spending.

Besides adverse demographics, several external features have contributed to the slowdown of the Korean economy. What are the means and instruments that the Bank of Korea finds applicable to incentivize domestic growth?

Entering this year, the Korean economy has slowed down, led by exports and facilities investment, affected by growing uncertainties surrounding external conditions, such as slowing global trade with the trade conflict between U.S. and China, and delayed recovery in the semiconductor industry.

Amid low demand-side inflationary pressures, inflation has declined to the 0% level driven by supply factors, such as international oil prices, and by a strengthening of the government’s welfare policy. Accordingly, the BOK lowered its policy rate from 1.75% to 1.5% in July and then from 1.5% to 1.25% in October.

However, aside from cyclical factors, structural and institutional factors have also played a considerable role in the recent low growth and low inflation. Monetary policy alone cannot solve this issue. Therefore, fiscal policy needs to play an active role, and structural reforms are also needed to improve productivity. This is the consensus reached after discussions among many central banks.

By promoting macroeconomic stability through the effective operation of monetary policy, the BOK will continue its efforts to create an environment where structural reform can proceed smoothly.

Korea is firmly committed to fighting the climate crisis and promoting sustainable growth worldwide. How does the Bank of Korea contribute to greening the economy?

The BOK carries out various activities with a focus on climate change, among the many green finance issues. For starters, the BOK adopted the ESG (Environmental, Social, Governance) investment guidelines this year to live up to the need for enhancing central banks’ accountability in foreign reserve management and to join efforts to have positive effects on the environment and society. While continuing research and studies into climate-related risks, the BOK has made efforts to deepen the general public’s understanding regarding climate change by releasing reports and giving public lectures.

In consideration of the importance of international coordination in responding to climate change, the BOK has also recently joined the Network for Greening the Financial System (NGFS), a voluntary platform and a forum for central banks and supervisors to manage climate and environment-related financial risks. In conjunction with these efforts, we have exchanged our views on climate-related risks with many relevant organizations, including the WWF (World Wide Fund) and the GCF (Green Climate Fund), and will also actively participate in international discussions going forward.