Seongtae Lee: Bank of Korea faces the challenges ahead
Speech by Mr Seongtae Lee, Governor and Chairman of the Bank of Korea, at the Bank of
Korea's 59th Anniversary, Bank of Korea, Seoul, 12 June 2009.
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Fellow members of the Bank of Korea,
Today is the 59th anniversary of the founding of the Bank of Korea as Korea's central bank.
First, I would like to thank all those who have contributed so much to making the Bank what it
is today. I would also give thanks to all of our members for their hard work in tackling the
difficulties arising from the global financial crisis.
In the wake of Lehman Brothers' filing for bankruptcy protection in September last year, the
financial markets and real economic conditions worsened significantly. Recently, however,
the economy has been showing signs of improvement. The economic downturn appears to
have flattened out, with some economic and confidence indicators showing favorable
movements. In the financial markets, stock prices have rebounded and the flow of funds to
the corporate sector is on a steady rise. The Korean won has appreciated and foreign
currency liquidity conditions have improved substantially as the current account has shifted
to a sizable surplus.
This is thanks partly to the improved external conditions, with the moderation of the global
financial market unrest, but chiefly to the wide-ranging policy measures taken by the
government and the Bank of Korea. The Bank has actively implemented monetary easing
policy, lowering its Base Rate to a record low of 2.0 percent and making use of open market
operations and lending facilities to mitigate the credit crunch. Together with this, in order to
stabilize the foreign exchange market, the Bank has supplied foreign currency liquidity to
financial institutions and established currency swap arrangements with central banks such as
the US Federal Reserve.
The Korean economy seems set to continue its recent improving trend, but it will be no easy
matter for it to shift to a full-fledged recovery track given the several destabilizing factors that
still exist both at home and abroad. First, it will take considerable time for the global financial
markets to return to normal, due to the prolonged global economic recession and the delay in
cleaning up and adjusting the balance sheets of major countries' financial institutions. There
is also the likelihood that the upward trend in prices of oil and other commodities may slow
down the economic recovery and hamper price stability. In addition, there are geopolitical
risks present concerning the North Korean nuclear issue.
My dear colleagues,
There are many policy tasks to be pursued for our economy to overcome the shocks caused
by the global financial crisis, and what is more, to maintain steady growth.
First of all, efforts to build up a foundation for more robust domestic demand should be
continued. The global economic outlook makes it difficult to expect a rapid recovery of
Korean exports for the time being. A worsening employment situation, moreover, may hinder
the recovery of private consumption and, along with sluggish facilities investment, lower the
growth potential. In this regard, it is important to promote a virtuous circle of employment and
growth and to strengthen economic resilience against external shocks through making
continued policy efforts to boost domestic demand and create jobs.
As it seems that the economic crisis has passed its peak, corporate restructuring has to be
speeded up. If the resolution of ailing companies is delayed, it will be difficult for the financial
markets to return to normal at an early stage with concerns over credit risk left unsolved,
while there is also the possibility that the external competitiveness of the Korean economy
may be reduced.
The financial and foreign exchange markets presently seem fairly stable, but more efforts
need to be devoted to keep them on a firm track. As part of such efforts, it is necessary to
develop measures which reduce the possibilities of market unrest from the large-scale in-
and outflows of foreign capital, while lessening dependence on short-term external debt.
Even when the financial markets and real economic conditions recover from this crisis, there
is a need to devise means of preventing financial institutions from becoming locked into
excessive competition for asset growth.
There should also be a keen awareness that the accommodative monetary and fiscal policies
implemented to tackle this crisis could impose a burden on the economy in the medium- and
long-term horizon.
My dear colleagues,
I would now like to talk about what the Bank of Korea should promote as its top priority in the
second half of this year and beyond.
The Bank should conduct interest rate policy with a main emphasis on supporting the
continuation of the recent improvement in the real economy and the financial markets. The
Bank will also pay close attention to the possibilities that a rise in international commodity
prices may disrupt the low and stable trend of prices and that rapidly swelling short-term
liquidity may cause instability in asset prices such as those of real estate.
The Bank also has to make constant efforts to strengthen the foundation for financial
stability. There is a need to examine the desirable scope of the Bank's financial stability role
drawing on our experience of this financial crisis, and discussions concerning framework
reform proposals and actual instances in major countries. In addition, the Bank should
endeavor to ensure that the general stance of emerging market countries, including Korea, is
fully reflected in the course of reaching a global consensus on financial stability. To this end,
we have to participate actively in discussions at G-20 meetings as well as in the Financial
Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS), both of
which our nation joined in March.
We have to do our best to set the inflation target, to be adopted for the period from next year
onward, at an appropriate level. Although inflation targeting per se is assessed to have
contributed considerably to price stability, both domestically and internationally, the Bank
must also review any shortcomings in the system based on its past experiences. The Bank
should make improvements in its operation, if necessary.
Among the key projects we are now pursuing, I would like to mention two in particular. The
running of the new BOK-Wire+, which went into operation this May, should be stable and
seamless. And every effort must be made to ensure the trouble-free supply and circulation of
the 50,000-won banknotes, to be introduced from June 23.
The various other businesses we handle should also be carried out without the slightest
slipup. Settlement risk needs to be managed still more thoroughgoingly to cope with the
expanded participation of non-bank financial institutions in the payment and settlement
system. We must take great pains to ensure that the systems introduced for improving the
efficiency of liquidity management, such as fungible issuance and prior fixed rate tenders for
Monetary Stabilization Bonds, achieve their desired results. In the management of the
foreign reserves, we should do our utmost to upgrade risk management further and come up
with ways to achieve stable returns in this period of low interest rates worldwide.
My dear colleagues,
The direction of financial and economic change at home and abroad remains very uncertain.
As a result, the central bank's accurate assessment of the situation and selecting of timely
and effective policy options are more important than ever for the national economy. Carrying
out this mission, the Bank should arrange its organizational and personnel management in
such a way as to maximize its potential. Full consideration also needs to be given to a new
organization in charge of activities related to the international financial institutions that the
country has recently joined to ensure that it plays its role to the full.
The Bank should also endeavor to improve internal management. Given that the efficiency of
the public sector is now subject to stricter external evaluation and that many people are
suffering hardship due to the difficult economic situation, the Bank has to redouble its efforts
to get rid of any organizational shortcomings and save costs.
Fellow members of the Bank of Korea,
The Bank of Korea has undertaken active policy initiatives in response to this global financial
crisis. These actions have contributed greatly to moderating the economic difficulties.
Yet still the crisis is far from over and new policy tasks are expected to arise even after the
crisis passes. Therefore, we should stay vigilant and remember once again that it is our
mission to maximize the potential of each and every member of staff in order to achieve the
stability of the national economy and its development. Through our unstinted efforts toward
this, the economy will return to normal earlier and the public credibility of the Bank of Korea
will be anchored still more firmly.
On this special day on which we celebrate the 59th anniversary of our foundation, I once
again appreciate your devoted commitment. I wish you and those you hold dear the best of
health and the greatest of happiness.
Thank you.