Juyeol Lee: New Year speech
New Year's address by Mr Juyeol Lee, Governor of the Bank of Korea, at the Bank of Korea,
Seoul, 4 January 2016.
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Dear fellow members of the Bank of Korea,
Today is the first day of work in 2016, which we greet with new hopes and resolutions. I wish
you and your families a happy new year full of good health and blessings. Let me also express
my sincere appreciation to all of you for faithfully carrying out your duties last year.
Looking back, we have of course never had any easy years, but last year the Korean economy
went through many truly great difficulties. On top of the continuous slump from the beginning
of last year in exports, which have led economic growth, we also witnessed a rapid contraction
in consumption due to the unexpected outbreak of MERS. Financial and foreign exchange
market volatilities increased greatly as well, driven by the uncertainties concerning the timing
of the US Federal Reserve's policy rate hike and by the economic unrest in emerging market
economies (EMEs) including China.
Against this backdrop the Bank of Korea eased its monetary policy further, by cutting the Base
Rate on two more occasions following the cuts in 2014, and by raising the total ceiling of its
Bank Intermediated Lending Support Facility to a large extent. We also worked actively to
stabilize the markets, by strengthening our monitoring of financial and foreign exchange
markets at home and abroad and by making efforts to prevent any excessive expansion in the
volatility of price variables.
However, our economic conditions were not satisfactory, as economic growth fell short of its
potential and inflation remained below the target range.
The recent low growth and low inflation are worldwide trends, and are attributable largely to
factors not easily dealt with through monetary policy such as sluggishness in global demand,
declines in international oil prices and changes in economic structures. The Bank of Korea,
which has the mandate of pursuing macroeconomic stability while paying attention to financial
stability, had to be alert to the possibility of its accommodative policy stance pursued over a
long period of time causing other adverse effects via the accumulation of financial imbalances.
Nevertheless, we have to also look humbly back, and ask whether there was any room for
improvement in terms of our assessments of economic conditions, our policy responses, and
our communication efforts.
Dear members of the Bank of Korea,
This year our economy is expected to maintain a modest trend of growth, thanks to the
continuing recovery of the global economy and to improvements in our households' real
purchasing power. Looking at domestic and external conditions, however, there are various
potential risk factors that could undermine the smooth recovery of our economy.
Externally, as international capital movements will likely expand due to both the weakening of
economic growth in China and the continuous decoupling of monetary policies among major
countries, EMEs having weak economic fundamentals could face economic crises. If these
concerns are realized, the international financial markets could turn unstable again, and the
global economic recovery could weaken.
Domestically, our economy faces still unresolved structural problems that could undermine its
vitality, including low fertility and population aging, inter-sectoral imbalances, and the dual
structure of the labor market. In addition, as the greatly increased household and corporate
debts are affected by the US Federal Reserve's monetary policy normalization, they could
cause consumption and investment sentiment to contract and work as a factor undermining
financial system stability.
Under these circumstances, the main tasks for Korea to focus on, as a small open economy,
are improving its economic fundamentals and boosting its growth potential. The prerequisite
for this is structural reform. This is not an easy task, because it leads to pain and sacrifice in
the short-term while there are also conflicts of interests among the economic agents
concerned.
If we keep pushing this reform ahead with perseverance, however, we can reap fruits that will
compensate us sufficiently for the pains that we must undergo. In particular, a successful
structural reform will help our economy to achieve faster growth than others once external
conditions improve, through the creation of new growth engines and through the restoration of
virtuous cycles between exports and domestic demand and between growth and employment.
Structural reform can also help to mitigate the negative effects on our economy of the
expansion in volatility in the international financial market. As you are all well aware, one
international credit rating agency recently upgraded Korea's rating to the levels of advanced
countries. And one of the main rationales for its decision was its positive assessment of our
efforts for structural reform.
Dear fellow members of the Bank of Korea,
I would like to touch now on the major tasks that we will need to focus on this year.
First of all, since we have newly set the inflation target, in consideration of the appropriate
inflation level for our economy in the medium- to long-term, we need to do our utmost to steer
consumer price inflation close to this target over a medium-term horizon. The new inflation
target has been set as a point target rather than a range, which is considered a more advanced
method adopted by major developed countries. There are many merits to the point target: it
not only effectively stabilizes the inflation expectations of economic agents, but also allows the
central bank to conduct monetary policy in a more flexible manner, taking into account inflation
as well as economic and financial conditions. We need to get the message across to economic
agents concerning the background to this change, and the characteristics of our new inflation
target. At the same time, we should devote every effort to fulfilling our responsibility of
explaining to the public any cases where inflation deviates from the target to excessive extents
or for excessive periods of time.
This year, under the new inflation target, in order to sustain the trend of recovery of economic
growth we will maintain our accommodative monetary policy stance, while also paying
attention to financial stability. Given the moderate pace of our economic recovery and our low
inflationary pressures, it is necessary for the time being that we very closely monitor
macroeconomic trends, while also being mindful of the downside risks to growth and inflation.
Secondly, we should also step up our efforts to enhance the predictability and effectiveness of
our monetary policy. In this regard, the most important thing is increasing the accuracy of our
economic forecasting. The unpredictability of economic dynamics has risen enormously, owing
to changes in the cause and effect relationships among economic variables and to the rising
interconnectedness across economies in line with globalization. We thus face limitations in
narrowing the forecast errors. But if the accuracy of our economic forecasts is inadequate, it
will be hard to maintain monetary policy efficiency or communication consistency. This is why
we need to redouble our efforts to strengthen our forecasting capabilities.
To strengthen our explanations of the backgrounds to our policy decisions, we also need to
enrich the content of the Monetary Policy Statements and expand the scope of the Monetary
Policy Board meeting materials released to the public. In addition, in order to secure the
appropriate time horizons for deciding on our monetary policies, and to strengthen the linkage
between monetary policy and our economic forecasts, we plan to reorganize the framework
for Monetary Policy Board meeting operation, with effect from next year. We need to thoroughly
prepare so that this can be achieved without delay. In particular, as the annual number of
monetary policy decision meetings will be reduced, we need to devote more efforts to
strengthening our communication with the market.
We need to pay greater attention to financial stability this year. First, we should seek measures
to ensure a soft-landing of the household debt problem, by cooperating closely with the
government and the regulatory authorities. Liquidity and fund flows through open market
operations should be properly managed, to prevent companies from suffering having financing
difficulties in the processes of restructuring. Since it is likely that the high volatility in our
financial and FX markets will continue this year, we have to thoroughly monitor international
financial market conditions and capital flow trends, and if necessary implement our
comprehensive Contingency Plan to ensure market stability, in a timely manner.
Meanwhile, as IT and finance become integrated, FinTech, big data and the uses of blockchain
technology are becoming global trends. In line with this, we need to carefully examine how
these changes will affect our policy environment, and in particular the stability of our payment
and financial systems. We also need to conduct an in-depth study of how Internet-only Banks,
whose launch is scheduled for this year, will evolve in the future, and what changes they will
bring to the monetary policy transmission channels and bank management environment.
Dear fellow members of the Bank of Korea,
As our economy remains in a difficult situation, and the economic and social environments
change rapidly, there have been diverse and sometimes conflicting demands from various
areas of society regarding the central bank's role. In this situation, in order for the Bank of
Korea to meet the nation's expectations and fulfill the role entrusted to it, we need to make
ground-breaking improvements in our ways of perceiving reality and carrying out our duties,
as well as in our methods of policy operation.
People tend to remain complacent in keeping to what they are used to and comfortable with,
and it is thus very difficult to break from old mind-sets and practices. I am well aware that our
Bank of Korea staff members have made enormous efforts to adapt to the changing external
environment. However, there does remain much room for improvement still, and so we need
to strengthen our dynamism for change. This can of course not be done in a day. We have to
work continuously to improve the relevant systems for increasing our recruitment of external
talent and promoting efficiency and competition in our personnel management.
Our society demands of us that we have much higher levels of integrity and stronger senses
of vocation than is necessary in other workplaces. And so it is a basic responsibility of ours
that we comply fully with the regulations and principles regarding our duties. Further, as
members of a central bank with strict self-discipline and a strong sense of responsibility, we
need to put the public interests before our own personal interests, and respect our
organizational values.
Meanwhile, our organizational culture of respecting and caring for each other is a longstanding
tradition that we have cultivated ever since the Bank of Korea was established. Although the
environment surrounding us is changing rapidly, we have to work to maintain and further
develop this proud tradition going forward.
Dear fellow BOK members,
There are substantial concerns that the Korean economy could face huge difficulties this year.
However, a crisis that is foreseen is no longer a crisis. If we are not too absorbed in pessimism,
and prepare for approaching difficulties with optimistic and active attitudes, we can help our
Korean economy to overcome any troubles it may face and to take itself one-step further to a
higher level.
I hope that you will fully demonstrate your strong competence and potential again this year, to
show that the Bank of Korea is indispensable to the development of our national economy.
I look forward as well to your beginning this new year with renewed vigour and determination,
and I wish you all happiness and fulfillment.
Thank you.