Bank of Korea Governor Rhee Chang-yong on Thursday signaled a cautious approach to monetary easing, warning that excessive interest rate cuts could stoke asset bubbles and currency volatility, even as the country faces mounting pressure to revive a flagging economy.
Speaking at the central bank’s 75th anniversary ceremony, Rhee acknowledged the urgency of economic stimulus in light of weak growth projections.
However, he stressed that any policy response must strike a balance between supporting short-term recovery and safeguarding the economy’s long-term resilience.
“While it is clear that stimulus is needed to support the recovery, relying too heavily or too hastily on accommodative policies risks generating larger unintended consequences,” he said. “We must avoid falling back into old patterns of overreliance on real estate-driven stimulus.”
Rhee noted that while the BOK maintains a dovish bias, it would carefully calibrate the magnitude and timing of any rate cuts, citing risks of overheating in property markets and growing financial imbalances.
Apartment prices in Seoul have risen at an annualized pace of roughly 7% since March, and household lending growth has accelerated, raising red flags for policymakers, he said.
“The real estate market is showing signs of renewed exuberance, particularly in the capital region,” the governor said. “If rates are lowered too aggressively, it may fuel speculative activity rather than stimulating productive investment.”
FINE-TUNING ACCOMMODATIVE STANCE
Gov. Rhee’s remarks on Thursday indicate a slight change from his stance last month, when he signaled further easing down the road.
“There is a possibility that the size of future rate cuts could exceed initial expectations,” he said at a media briefing on May 29 after the BOK cut its benchmark interest rate by a quarter of a percentage point to 2.5%, citing a steeper-than-anticipated deceleration in growth momentum.
Rhee said that four of the six voting members favored keeping the door open to further cuts within the next three months.
The central bank also lowered its 2025 economic growth forecast to 0.8% from its previous projection of 1.5%.
Rhee’s comments come as Korea’s newly elected President Lee Jae-myung is working on a supplementary budget to revitalize the domestic economy, Asia’s fourth-largest.
During his presidential campaign, Lee pledged an extra budget of at least 30 trillion won ($22 billion) to support households and small businesses still reeling from the effects of the pandemic and elevated inflation.
‘WON’S STRENGTH COULD BE SHORT-LIVED’
Gov. Rhee said the Korean currency’s recent strength – hovering in the mid-1,300 range against the dollar – could be reversed if the interest rate differential with the US widens, especially amid uncertainties surrounding US monetary policy and global trade tensions.
Korea’s financial markets have shown strong gains since Lee took office on June 4, with shares surging to an 11-month high and the won hitting a seven-month high as post-election optimism over the Lee administration drove renewed interest from foreign investors.
STABLECOIN
Rhee also touched on the central bank’s ongoing work in digital innovation, highlighting progress on Project Han River, or Hangang, a pilot platform for wholesale central bank digital currency (CBDC) using deposit token architecture. The initiative aims to evaluate the operational viability of future digital currency infrastructure in real-world scenarios.
As discussions around stablecoins heat up globally, Rhee stressed the importance of designing a regulatory framework that ensures the stability and usefulness of any won-denominated stablecoin, while preventing circumvention of Korea’s foreign exchange regulations.
“The potential for stablecoins to substitute legal tender demands a cautious and coordinated approach,” he said. “We are working closely with relevant agencies to ensure these innovations do not undermine financial or regulatory stability.”
The BOK is cautious about non-banks and fintech firms issuing and handling stablecoins amid a global cryptocurrency rally.
In a related move, the ruling Democratic Party proposed a bill earlier this week, dubbed the Digital Asset Basic Act, aimed at promoting the country’s digital asset industry within legal frameworks for greater transparency and fair competition.
On Thursday, Rhee also said the BOK plans to introduce a sovereign AI system, developed by domestic firms and tailored to the central bank’s needs, later this year.
By Jin-gyu Kang
josep@hankyung.com
In-Soo Nam edited this article.
