Seongtae Lee: The global financial crisis and the Bank of Korea's
monetary policy
Keynote address by Mr Seongtae Lee, Governor of the Bank of Korea, at the Euromoney
Conference, Seoul, 28 May 2009.
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Greetings
Ladies and gentlemen,
I am delighted to be here to speak at "The Euromoney Korean Capital Markets Congress
2009" with prominent institutional investors, financiers and academic experts from around the
world.
My remarks today will focus on the recent global financial crisis, the Bank of Korea's
monetary policy response, and the tasks that remain in the future.
Development and impact of the global financial crisis
Ladies and gentlemen,
As you know, this global financial crisis struck as the impact of the US sub-prime mortgage
meltdown spread worldwide and it triggered a synchronized global economic downturn.
The main reason that this financial crisis spread with such a wide range and at such
unprecedented speed lies in the massive progress made in the integration of the world
economy and financial markets over the last two decades.
As this crisis progressed, Korea and other emerging market countries were unable to avoid
its impacts even though they did not have large sub-prime mortgage related exposures.
Rather they experienced deteriorating foreign currency supply and demand conditions and
credit crunches, as funds flowed out due to deleveraging by overseas financial institutions in
response to heightened concerns about credit risk. Their real economies also slipped into
recessions, as their exports shrank rapidly owing to the contraction of import demand in
advanced countries.
The Bank of Korea's policy response and its effects
Ladies and gentlemen,
The Bank of Korea eased its monetary policy aggressively, to soothe the financial market
unrest and ward off a sharp contraction of the real economy. It brought its Base Rate down
by a total of 3.25 percentage points, to its lowest level of 2%, in six steps from last October
until this February. Along with this, it strove to expand provision of liquidity to sectors badly
affected by the credit crunch through its open market operations and lending facilities. At the
same time, it actively provided foreign-currency liquidity to domestic financial institutions
through, for example, the swap market, in order to stabilize the foreign exchange market that
was directly hit by the impact of the global financial crisis. It also entered into currency swap
arrangements with the central banks of the United States, Japan and China.
The Korean financial and foreign exchange markets have recently been showing a pattern of
improved movements helped by these actions. Long- and short-term market interest rates
are maintaining downward stability while stock prices and the exchange value of the Korean
won have rebounded substantially. In addition, the issuance of corporate bonds is
proceeding seamlessly and bank lending to households and SMEs is steadily increasing.
In the real economy, the speed of the downturn has clearly moderated, and some economic
and confidence indicators are showing better movements than expected. As a result of these
developments, the perception of the Korean economy among foreign investors has improved
considerably. There remain, however, downside risks to economic growth for the future, due
to the persistence of the global economic downturn and the worsening of domestic labor
market conditions.
Tasks ahead
Ladies and gentlemen,
The Bank of Korea will, for the time being, conduct its monetary policy with a main emphasis
on supporting the recovery of economic activity and stabilizing the financial markets. It is still
uncertain whether the green shoots of recovery in the financial markets and real economy
will continue into full leaf. Even if this monetary easing stance is maintained for a while,
prices are expected to remain on their downwardly stable track since demand-side inflation
pressures are almost absent.
The experience of this global financial crisis has served to spur full recognition of the vital
necessity for efforts to secure financial stability. The legal framework in relation to financial
stability requires overhauling in this context, but to my mind, in light of past experience, what
is of great importance for Korea and other small open economies is to draw up proposals to
reduce the potential for financial unrest arising from large-scale in- and outflows of foreign
capital. Of course, international agreement should be reached as a prior condition for such
proposals, through discussions in forums such as the G-20, since they could restrict market
principles and give rise to conflicts of interest among countries.
I would also point out that for Korea, the bilateral currency swap arrangements have been of
considerable help in calming foreign exchange market unrest during this crisis.
Consequently, we will seek to strengthen our international financial cooperation still further
by, for example, striving to construct a framework of multilateral currency swap arrangements
among countries in the Asian region.
Closing remarks
Ladies and gentlemen,
Drawing my remarks to a close, let me express my profound hope that everyone at this
conference will obtain fruitful information concerning the Korean economy and take part in a
lively exchange of opinions. And, as a result, I trust that this conference will contribute to the
flourishing development of the institutions represented here and to the stability and growth of
the Korean economy.
Thank you.