Lee Chang-yong: "Downward Pressure on Next Year's Growth Rate is High... The Sooner the Supplementary Budget, the Better"

Bank of Korea Governor's Inflation Check Meeting

Exchange Rate at 1,430 Won Could Raise Inflation by 0.05%P

Consumption Contraction... Growth Rate Below 1.9% Next Year

Draws Line on 'Big Cut' in Base Rate in January Next Year

Lee Chang-yong, Governor of the Bank of Korea (pictured), stated on the 18th that "this year's economic growth rate will remain at 2.1%." He predicted that the 2.2% growth presented at the end of last month would not be achieved due to deteriorating consumer sentiment following the declaration of martial law. While mentioning the necessity of a supplementary budget for economic recovery, Governor Lee emphasized that the "target must be clear," drawing a line against indiscriminate cash support policies.

On this day, Governor Lee held a briefing session on the operation status of the inflation stability target at the Bank of Korea's annex in Namdaemun-ro, Seoul, and made this statement. The background for lowering this year's growth forecast was cited as sluggish consumption in the fourth quarter. Governor Lee explained, "We initially predicted a 0.5% growth rate for the fourth quarter, but based on card data, it seems it will be 0.4% or slightly lower."

Next year's growth rate is also likely to fall below the 1.9% presented last month. Governor Lee said, "The budget bill passed by the National Assembly will have an impact of about -0.06% points on next year's growth rate," adding that "downward pressure has increased."

The exchange rate was also cited as an unstable factor. On this day, the won-dollar exchange rate in the Seoul foreign exchange market (as of 3:30 PM) ended weekly trading at 1,435 won 50 jeon. Although it fell by 3 won 40 jeon from the previous day, it is more than 30 won higher than before the declaration of martial law.

Governor Lee predicted, "If the current exchange rate is maintained, it could raise inflation by about 0.05% points," but added, "The 30 won increase due to political reasons will stabilize, and global dollar strength factors will guide the exchange rate."

To dispel concerns about low growth, Governor Lee proposed the swift formulation of a supplementary budget. He said, "In a situation where there is significant downward pressure on the economy, I think it is good for economic sentiment if the ruling and opposition parties and the government agree to announce a new budget," adding that "if we show that economic and political agreements are reached quickly, it can strengthen the argument that the economy and politics are separate."

However, Governor Lee drew a line against the notion that the current necessary supplementary budget should "unconditionally release finances." He said, "It is different from the COVID-19 period," and "it is desirable to temporarily target specific items for expenditure." This is interpreted as meaning that it is not the time for fiscal policies like the 250,000 won support for all citizens, a key policy of Lee Jae-myung, leader of the Democratic Party of Korea.

The path of monetary policy is also expected to be influenced by such economic conditions. In response to a question about the direction of monetary policy next month, Governor Lee said, "(The January rate) will be decided based on data," but added, "In the current situation, there is a downward risk to the economy and consumer sentiment has deteriorated." It was evaluated that there is a possibility of three consecutive rate cuts if the economy is bad. However, Governor Lee drew a line on the possibility of a big cut (a 0.5% point cut in the base rate at once) in January, saying, "It's not to that extent."

Governor Lee said, "The economy is too depressed due to unexpected and unnecessary shocks," and emphasized, "It is important to recover quickly."

He also urged, "Rather than shrinking back in vague fear, I hope the public will return to daily life and engage in normal economic activities."

Kang Jin-kyu josep@hankyung.com