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Firm steps are needed – Interview with Yang Su Park (Bank of Korea)


Eurasia notes


Firm steps are needed – Interview with Yang Su Park (Bank of Korea)


29 November 2021

By Fellegi Tamás Péter. Published in Magyar Nemzet:

As it was also stressed at the Budapest Eurasia Forum 2021, in the 21st century, the world may also need to cope with new, unpredictable challenges, just like the current pandemic – Yang Su Park, Director General of the Economic Research Institute of the Bank of Korea, told Magyar Nemzet. He highlighted that there is a debate on the extent to which central banks should play a leading role in this respect, and whether they have the ability to do so at all. – Personally, I do not have a clear answer to such questions. All I can say is that one point is clear: central banks should be more active and aggressive than in the past – he concluded.

How successful is the Korea New Deal that was launched last year?

The Korean New Deal is a comprehensive national development strategy aimed at improving the country’s economic structure, which currently faces limitations to input-based growth, driving an early recovery from the COVID-19 pandemic, and transforming the country into a first-mover in the global economy. The Korean New Deal focuses mainly on the digitalization of the overall economy and society (the Digital New Deal) and also on the shift to a low-carbon economy (the Green New Deal).

At the moment, the Korean government is aggressively making large-scale budget injections, which are planned to continue until 2025. At the same time, the government is introducing measures to improve related institutions to facilitate the above-mentioned transitions, as well as to attract follow-up private investment.

Since the Korean New Deal is still in its early stages, and due to its nature, being a large-scale project with the aim of changing the structure of the entire economy, it is probably too soon to judge its success. However, we can at least say that we are on the right track and that the Korean New Deal is promising, given the changes in behaviour and perception among economic agents caused by the unprecedented pandemic: they are moving toward a more digitalized and eco-friendlier world.

I think this is the reason why the Korean New Deal has in general been so well-received by the international community. The OECD has made the assessment that the Korean New Deal supports eco-friendly and inclusive economic recoveries by investing in digital, green, and human resources. The IMF has said that the Korean New Deal pursues both new engines of economic growth and the expansion of inclusiveness after the COVID-19 pandemic. It also noted positively that eliminating entry barriers, promoting competition, and resolving labour market rigidity as parts of the New Deal would further elevate potential growth for the Korean economy.

Most developed countries are now fighting against inflation. How did the Korean Central Bank adjust monetary policy because of inflationary pressures?

Although domestic bottlenecks have not yet been a major issue in Korea, the impact of bottlenecks from abroad has recently been increasing and putting upward pressure on inflation through higher energy prices, notably for oil. This has resulted in heightened inflation synchronization with other economies. Coming into this year, monthly inflation correlation between Korea and other major economies jumped to over 0.95, compared to a pre-pandemic range of 0.3 to 0.7, which has led to our consumer prices rising 3.2% in October, greatly exceeding our 2% inflation target.

To make matters worse, financial imbalances have been formed during the COVID crisis in Korea. Housing prices in the Seoul metropolitan area have jumped by more than 40% compared to pre-COVID levels. Due mainly to these trends in real estate markets, household debt has been accumulating very fast. The household debt-to-GDP ratio has increased sharply by about 13.1%p to 105.8% as of the second quarter 2021 from its pre-COVID level of 92.7% in 2019.

With this as backdrop, the Bank of Korea has initiated the process of gradually undoing our unprecedented easing measures. In August 2021, we raised our policy rate by 25 basis points, and macroprudential policy is going in the same direction.

Is the Bank of Korea planning to develop its own digital currency?

Like many other central banks, we do not see an urgent need to issue a CBDC in a hurry. In Korea, many people still prefer to use cash, which is different from in some Nordic countries. Also, almost every Korean adult has bank accounts and multiple credit and debit cards, and various smartphone-based payment services are being offered by banks, credit card companies and fintech firms, too. Thus, financial inclusion is not really a serious concern in Korea. As such, we don’t believe that trying to be quick about issuing a CBDC should be our top priority. Instead, we think that it is more important to take the time to prepare for a CBDC properly.

However, the recent trend in the decline in the use of cash, rapid changes in the payment landscape driven by big tech companies entering into the payment sector, and the possibility of the widespread adoption of stable coins and other private digital currencies, are all huge concerns that central banks should be worried about.

Taking these into consideration, we established a dedicated CBDC research team in January 2020 to systematically carry out our CBDC research. We are actively doing research into various aspects of CBDCs, including the technical and legal sides, as well as monitoring the global digital currency landscape and policy analysis. In particular, we have been undertaking a CBDC virtual experiment since August this year, in partnership with private sector IT firms, and this will run for about 10 months.

How can the Bank of Korea support the country’s transition to carbon neutrality?

The BOK is paying attention to the possibility that climate change will have a significant effect on its mandates of price stability and financial stability, and it is aware of the need to contribute to minimizing the risk arising from the transition to a low-carbon economy, a national mission. As responding to climate change is becoming an increasingly urgent task, the Bank is committed to a timely response, in-line with growing calls from the market for central banks to play a role in climate change responses, and as the social consensus surrounding the issue progresses.

Recognizing all of this, the Bank of Korea (BOK) has an action plan to face climate change in its research and in its available monetary policy tools.

The BOK is also planning to continually seek ways to incorporate climate change components into its lending, collateral frameworks, and open market operations, with the view of inducing funds into green sectors. Environmental, social and governance (ESG) components have already been reflected in our investment strategy for FX reserves management and will be further expanded.

Are there any other areas in the economy the central bank is planning to support?

At the moment, we are dedicated to fulfilling our primary mission: ensure price stability and address financial imbalances. In addition to that, we are also focusing on support for the aforementioned social and economic transitions regarding the Korean New Deal, climate change, and a CBDC.

As discussed recently at the Budapest Eurasia Forum, however, in the 21st century many countries are likely to face challenges arising from the new megatrends, which, by their nature, may be unpredictable, just as COVID was. It is and probably will be controversial if central bankers could and should take a lead role in tackling all these diverse issues, and, personally, I do not have a clear answer to such questions. All I can say is that one point is clear: central banks should be more active and aggressive than in the past.

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