Transcription
Actually, I think, uh, this is a criticism that, uh, I got a lot, uh, domestically these days: why are you not cutting uh, interest rates more actively? I think there are many reasons. I think monetary policy and interest rates cannot solve every problem.
Okay, and then, uh, for the time being, I think the government is trying to find a way to expedite uh, their expenditures. Korea is very good at those fronts because we have a more electronic system that we can rely on for government expenditures. We are very accustomed to having this kind of swift fiscal uh, support for various uh, fiscal cycle management.
So, as you mentioned, the problem is that if you use fiscal stimulus too much, that year is good, but on the other hand, the next year's growth prospective will be reduced unless you keep on increasing the fiscal, you know, stimulus. In Korea, I think the government is very, uh, respected in this regard. So, probably, I hope that they will do some modest uh, fiscal stimulus without hurting fiscal sustainability.
But because we didn't see that fiscal action coming fast enough, we thought that in the previous rate decision, you would actually cut rates, but you actually held. Doesn't the Bank of Korea need to step up efforts right now? We are definitely, uh, also in an interest rate uh, reduction cycle.
So, when and how much? We will look at all other uh, elements, but definitely, uh, we think that uh, monetary policy and fiscal policy both have room to have more accommodative policies, especially now that you have seen a few weeks of the Trump presidency and all of these tariff threats coming into place.
Right, right. So, uh, that is why emphasizing more fiscal stimulus is uh, necessary. First of all, we, uh, in the last two years, when we had a very high inflation period, unlike other countries, our Ministry of Finance maintained a very uh, conservative fiscal policy.
So, in some sense, we have more fiscal resources when the economy is now heading uh, below the potential growth rate. So, we have room. And second, monetary policy has room to uh, cut because our current uh, interest rate is slightly higher in the restrictive area.
But on the other hand, as you mentioned, even US policies and US Fed policies, the depreciation pressure is building up. So, with monetary policy, we have to consider both the stimulus effect as well as its impact on other exchange rates and other uh, areas too.
So, that is why I think the policy coordination between fiscal and monetary policy is very necessary at this moment. We heard all of your board members were in line with being open to a rate cut in the next three months. That does not mean this is all called for guidance, but that is also uh, conditional.
So, yes, in January, uh, all of our members said that given that we hold the interest at the time, looking at the economic conditions, there is a good chance that we will cut the rate in our next three months' period meetings. But that does not mean, uh, kind of agreement that they will definitely look at the new evidence, and based on the new evidence, they can change their mind.
But, uh, at this moment, that is the nature of monetary policy. It seems to be that right now, the won is stabilizing at that mid-1400 levels. Is that sort of the new normal?
Now, I wouldn't say new normal because if I say new normal, it means that I have a certain level in mind. I think we have to look at what drives the uh, our exchange rate. If I phrase this way, I think in December, I was very uncomfortable because our exchange rates were moving a lot, depreciating a lot more than other currencies because of political reasons, which is our own unique reason.
On the other hand, in January, actually, the Korean won behaved better than other currencies because this abnormal reason is subdued. While still, in terms of level itself, the Korean won is also affected together with other currencies by the strong dollar trend.
Why not make a move now when potentially the effects and fallout of all of these different risks from the domestic and external factors could come in at some point later in the year?
Actually, I think, uh, this is a criticism that I got a lot, uh, domestically these days: why are you not cutting uh, interest rates more actively? I think there are many reasons. I think monetary policy and interest rates cannot solve every problem.
Okay, and then, uh, if you have a low interest rate, it will definitely help people to pay back their debts and may stimulate a little more stimulus to the economy. But on the other hand, you have to think about the negative side impact.
One is that it may end up increasing asset prices, especially real estate prices. It has a direct impact on the exchange rate, and, uh, yes, we can manage it, but it really depends on the environment. If the exchange rate is depreciating quite rapidly, you don't want to put the uh, oil in the fire, right?
That signaling, when it comes to fiscal policy, is so important for also household sentiment. Right? How are they doing at a time when prices are still rising? I mean, inflation right now, the latest one overshot your target, right?
You know, but our inflation reached our target a lot earlier than any other countries. In the last two to three months, our inflation was below 2%, and in December, it was like 1.8, 1.9. Now, the recent figure went up to 2.2% because of the uh, depreciation of currency, exaggerated by the higher oil prices.
But, uh, given that the uh, last year, in the beginning of the year, oil prices were quite high, if you think about the base impact, I think the inflation rate for the next couple of months will probably move down around the 2% level.
What about imported inflation? At that point, I mean, what level of the won would reflect economic fundamentals? So, I think I already mentioned that, uh, you know, last month, our exchange rate went to like 1470, so about 71 higher than uh, prior to the martial law declaration.
If it stays there for the whole year, then we will have about, at that time, we are projecting 1.9% as an inflation rate. But if the won stays around the 1470 level for a long time, I think our inflation will have to at least give 0.15% more, so it will be like a 2.1, 2.5 something rate.
So, we won't be like 3% or something. But if the exchange rate depreciates, that definitely will cause our inflation rate to be higher, which would then in turn make it more challenging to cut rates.
Right, yeah, sure, but we are not at that stage yet. So, currently, as of today, our exchange rate is about 1450, and depending on the US tariff policies, especially with respect to China, and then also Japan's monetary policy decision down to April and July, there's room for the exchange rate to move both sides.
At the same time, in our calculation, about 31% increase of the exchange rate was due to this uh, martial law declaration, political reasons. So, there's room that once our political situation becomes much more stabilized, that portion can go down.
So, it's very hard to predict which direction the exchange rate will go. You have experience as the IMF director of Asia Pacific during the first term of President Trump. Can you get any lessons from how the economy, rates, and effects moved back then because of the trade policies, and do they apply now?
Actually, that was a kind of benchmark that when I think about Trump 2 uh, policies, I thought that my experience would help very much. But now, I believe that the second term of the Trump administration is quite different from the first time.
So, I don't want to say what's so different. It's not just the tariff policy. I think it's very hard at this moment to, I have to look at more, but this may change a lot of uh, international order. So, we'll see how it goes, especially those comments around the US taking over Gaza, the Middle East tensions.
I think I won't comment on it, but at this moment, I think what I'm feeling is that it can be much more broader than tariffs. External shocks are coming from the likes of oil prices.
Look, uh, as an economist, and especially trained economist by the IMF, and as policymakers in Korea, you do not, uh, you know, excuse that. Why you missed the uh, reason? Why? What reason to try? You look at the market. When the market changes, you adjust your policy. That's your job.