New Year Speech
January 2, 2020
Juyeol Lee
ᄐᄐ
Governor
ᄐᄐ
Bank of Korea
(This is an unofficial translation prepared by the
Bank's staffs based on original speech released on
December 31, 2019.)
Today we start our first tasks of 2020, filled with new hope and resolve. I would
like to begin by expressing my heartfelt gratitude to all of you, for so faithfully
carrying out your duties throughout the past year.
Our economy faced many difficulties last year, due to a deterioration in external
conditions. Global trade contracted, affected by the trade tensions between the US
and China, while exports of semiconductors, the major engine of Korea's economic
growth, also declined significantly. In line with developments in external
uncertainties, we saw frequent escalations of volatility in our financial and foreign
exchange markets, and weakening economic sentiment. As a result, the Korean
economy grew at around 2% last year, the lowest level seen since the global financial
crisis. The inflation rate remained low in the 0% range, held down by supply-side
factors and the government's strengthened social-welfare policy amid weak
demand-side inflationary pressure.
Against this backdrop, the Bank of Korea is operating the Base Rate at 1.25% after
two rate cuts last year, in July and October, with a view to supporting economic
recovery and easing the downward pressure on inflation.
This year, our economy is expected to improve, albeit at a moderate pace, as the
sluggishness in the global trade starts to gradually ease and the semiconductor
sector steadily recovers. However, the external and internal conditions facing our
economy still remain tough.
Globally, the structural factors that have been weighing on global growth
continue to exist. Although we have recently seen slight progress in trade
negotiations between the US and China, protectionism and geopolitical risk still
remain as downside risks. Domestically, we cannot but be concerned about the
weakening of our growth potential. Needless to say, our growth is constrained by
the low fertility rate and population aging, dual labor market, and social
polarization. Export-oriented growth has become more difficult to achieve than in
the past due to the weakening of the global value chain.
Considering these economic conditions, the most important task that we should
focus on this year is pursuing economic recovery in the short run while enhancing
the drivers of innovative growth. Given the change in demographics and the
advance of the Fourth Industrial Revolution, new growth engines can no longer be
created through larger inputs alone. We need to devote all our energies to
strengthening productivity across the economy and fostering new industries. We
must provide unwavering support to create an environment in which the private
sector can unleash its creative and innovative potentials, thereby expanding
investment, creating quality jobs and heightening efficiency. Shifting to an
innovation-based economy will entail numerous challenges. However, delaying this
process to avoid headwinds will distance us from greater growth potential.
Dear members of the Bank of Korea!
Let me talk now about the main tasks that the Bank of Korea will need to focus
on this year.
We will have to conduct our monetary policy so as to support economic recovery
and to ensure that inflation stabilizes at the target level over a medium-term horizon.
Since it is forecast that our economy will grow at a pace below the potential level,
and that demand-side inflationary pressures will not be high, we will need to
maintain our accommodative monetary policy stance. In this process, we will
determine whether to adjust the degree of monetary accommodation, based on an
assessment of wide-ranging factors such as external risk developments, domestic
macroeconomic trends, and any changes in financial stability conditions.
I would like to once again highlight the critical importance of accurate diagnosis
and forecasting of economic developments for the timely and effective operation of
monetary policy. We will need to improve the precision of our forecasting by
expanding the scope of financial and economic indicators and utilizing information
technology. The remarkable development of digital technology offers us tools to use
the vast amount of real-time information related to economic activity. We need to
equip ourselves with the abilities to analyze and forecast precisely based on AI and
big data. In terms of economic analysis and forecasting, we must consider the
possibilities that the behaviors of economic agents and the relationships among
major economic variables may have changed significantly from the past.
We will also need to pay closer attention to policy communications. In this
persistently low-interest and low-inflation environment, we may face an increased
possibility of conflict between the two goals of price stability and financial stability.
Therefore, a clear rationale behind the Bank's decision-making should be presented
so that economic agents can easily understand its policy decisions. Since inflation is
hovering below our target objective, we need to thoroughly analyze and review
price conditions and explain them to the public in detail.
Continuous efforts must be devoted to researching medium-to long-term tasks in
response to evolving policy conditions. Recently, there has been active research in
major economies about rethinking the monetary policy framework. The Bank of
Korea should also give thought to its policy operation system and in so doing refer
to the discussions at major central banks. We should examine how inflation
dynamics and policy conditions have changed, while reviewing whether there are
areas for improvement in our inflation targeting framework and exploring efficient
ways of operating it. In preparation against a reduction of the interest rate policy
space, the Bank will strengthen its research into the application of non-interest rate
monetary policy instruments that are appropriate for domestic financial and
economic conditions over the medium- and long-term horizon.
Financial stability requires our best efforts as well. The Bank should thoroughly
monitor the possibility of financial and foreign exchange market unrest and conduct
market stabilization measures in a timely manner if necessary. Our review of
financial systemic risks should also be strengthened. We should keep in mind that
the search for yield driven by low interest rates could cause a concentration of funds
in the real estate market or risky assets, amplifying financial imbalances. The
possibility of increased household and corporate credit risks and their effects on
financial institution soundness should also be closely monitored.
With advancements in digital technology, payment and settlement systems are
growing in importance. As the central body of the payment and settlement systems,
we will need to continuously expand and improve the related infrastructure and
upgrade the surveillance system in accordance with technological development.
Research on innovative technologies related to payments and settlements should not
be overlooked as well. While organizing a task force dedicated to the research
related to central bank digital currency and adding more experts in this field to the
workforce, the Bank of Korea will have to participate actively in related discussions
at international organizations. The project of establishing the next generation BOK
Wire+, which will serve as the backbone of future payments and settlements, should
be completed within the year as planned.
Dear members of the Bank of Korea,
Recently, financial and economic conditions have changed in unprecedentedly
rapid and complex ways, making it hard to predict even in which direction they
might develop. Considering this, it is no wonder that the general public has great
interest in and expectations toward the central bank, which plays a pivotal role in
macroeconomic policy. We should thus keep in mind that the only way for us to
earn public trust is to prepare ourselves thoroughly for policy environment changes
and respond appropriately to them.
Above all, flexibility and expertise are needed in order to respond more
preemptively and swiftly under the rapidly changing policy conditions. We should
not take for granted that existing theories and practices are correct. While reinforcing
expertise in individual fields, we should listen to a variety of outside opinions with
an open mind. Based on this, we should actively come up with realistic and suitable
options for the tasks at hand.
Moreover, "Vision 2030," which is underway in commemoration of the 70th
anniversary of the founding of the Bank, should include strategies that can induce
specific and practical changes. The next ten years will be significantly different from
the past in terms of the speed and the nature of change. We need to predict future
changes and give serious thought to what role the central bank should play going
forward in response to this new environment. First and foremost, the organization
and personnel management system and the way we work should be redesigned in
accordance with the new future image of the central bank. To this end, and most
importantly, all members of the Bank will have to recognize that we must change
and prepare for the future together.
My fellow members of the Bank of Korea,
Although global and domestic conditions are difficult, we still possess the
potential with which we overcame even bigger crises. Armed with confidence, we
need to prepare for the potential risks that our economy could face going forward. I
ask all of our staff to make their best efforts to fulfill their duties and responsibilities.
As we greet this new year, I want to wish you all the very best of health and
good fortune. Thank you.
January 2, 2020
Governor
Juyeol Lee