Central bank Gov. Rhee warns again about debt, plugs CBDC

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Central bank Gov. Rhee warns again about debt, plugs CBDC

Published: 21 Apr. 2022, 17:41 Updated: 22 Apr. 2022, 14:04

Bank of Korea Gov. Rhee Chang-yong delivers his inaugural address in central Seoul on Thursday. [YONHAP]

Bank of Korea Gov. Rhee Chang-yong discussed debt and the need to contain it during his inaugural speech on Thursday. He also noted that monetary policy alone is not enough to guide the economy through challenges and expressed enthusiasm for a digital currency.

"The Bank of Korea cannot ignore the need for a soft landing of debt issues," Rhee said.

He was unanimously approved for the central bank governorship at a National Assembly confirmation hearing on Tuesday and formally became governor on Thursday.

Korea has one of the highest household-debt-to-GDP ratios, and the borrowings are beginning to weigh on the economy.

During his confirmation hearing at the National Assembly on Tuesday, Rhee emphasized Korea's debt, saying the problem must be addressed by steadily raising rates and by preparing for any collateral damage that might come as personal balance sheets are stressed.

The household debt “growth rate should be alleviated through interest rate signals,” he said Tuesday.

Bank of Korea Gov. Rhee Chang-yong, left, receives a certificate of appointment from President Moon Jae-in at the Blue House on Thursday. [NEWS1]

On Thursday during his inaugural address, he continued along those lines, noting the dangers of collapsing bubbles and the need to contain them. He also discussed aging society, poverty among the elderly and income inequalities.

Since being nominated for the governorship, Rhee has been keeping the market guessing as to whether he is a hawk or a dove. While he has promised steady rate increases and noted several times the dangers of indebtedness, he has also indicated that Korea can trail the monetary policy of the U.S. Federal Reserve, which is slightly behind the curve on tightening but has promised to raise rates rapidly in the face of high inflation.

In his Thursday comments, Rhee also noted non-monetary measures that are important in keeping the economy on course, suggesting that the central bank alone cannot be expected to do everything. He said that fiscal policy and structural reform should take place together with monetary policy.

"The Korean economy is standing at a crossroad of a major transformation amid an accelerating transformation towards digital economy and the retreat of globalization that will become the new normal following Covid," he said.

Rhee said in his speech that the digital economy and green finance have become crucial issues that the Bank of Korea should not ignore. The central bank should prepare for a Central Bank Digital Currency (CBCD) "as if it is a matter of our survival," according to Rhee.

CBDCs are virtual forms of a fiat currency issued and regulated by a monetary authority or central bank. They are being developed by central banks globally, as cash usage falls and finance becomes quickly digitized.

Rhee said the environmental changes that will be brought by CBDCs will have significant impacts on public payment and settlement infrastructure as well as on the effectiveness of monetary policy.

The Bank of Korea recently completed the first phase of CBDC testing with successful results, with the second of the two phases set for completion in June.

Korea "has reached a stage where we can share our experience and research achievements and influence the global agenda," Rhee said, encouraging the central bank employees to become intellectual leaders that contribute to the government's policy setting and help private sector decision making.

Born in 1960, Rhee earned an undergraduate degree in economics from Seoul National University and a doctorate from Harvard University. At the IMF, he was in charge of overseeing lending operations and the surveillance of economies in the region, including China, Japan, India and those in the Pacific.

BY JIN MIN-JI [jin.minji@joongang.co.kr]