BOK governor says financial stability key for monetary policy determiner

Economy

Published: 30 May. 2024, 16:56

BOK governor says financial stability key for monetary policy determiner

Bank of Korea (BOK) Gov. Rhee Chang-yong, left, and Swiss National Bank Chairman Thomas Jordan during the 2024 Bank of Korea International Conference held in central Seoul on Thursday [BOK]

Financial stability, alongside inflation control, is a key factor to consider when the Bank of Korea (BOK) identifies the neutral rate of interest, the central bank governor said on Thursday.

"We're always trying to get an R*[neutral rate of interest] estimate that reflects financial stability, too,” and not only price stability, said BOK Gov. Rhee Chang-yong during the 2024 Bank of Korea International Conference held at the central bank’s headquarters in central Seoul.

The neutral rate of interest, also referred to as a neutral rate or R*, is the level of a long-term interest rate when a country’s monetary policy is neither contractionary nor expansionary. It serves as a crucial reference point for monetary policy.

According to Rhee, the neutral rate goes up when financial stability is taken into account, compared to when price stability is the primary concern.

The comment came during Rhee’s dialogue session with Swiss National Bank Chairman Thomas J. Jordan, the keynote speaker for the annual conference. This year’s theme for the two-day event is “The Evolution of the Neutral Interest Rate and its Implications for the Global Economy.”

Do Kyeong-tak, an economist at the BOK, is set to deliver a presentation on Korea’s neutral rate range estimates on Friday.

According to Jordan, the real interest rates in major economies fell steadily over the past 40 years to the negative level, before taking an upturn to hover slightly above the 0 percent level since the pandemic, mainly due to global monetary tightening.

“A lively debate has emerged on whether real interest rates will return to their pre-pandemic levels, or whether they will remain higher because the neutral rate of interest, R*, has increased,” said Jordan.

The chairman cited low potential growth and increasing life expectancies as some of the factors that may keep interest rates low. Large fiscal deficits, technology development, green transition investments and lower savings caused by aging demographics may drive a persistent rise.

Meanwhile, Rhee and Jordan also discussed the slowing growth of European economies, with the Swiss central bank chief saying that the diverging pace of growth between the United States and the Eurozone poses a significant challenge to the latter.

“We hope that […] all the decisions in politics in Europe go in a way that potential growth can catch up with other countries, especially the United States,” said Jordan.

The annual conference was attended by policymakers and prominent academics across the globe, including Nobel laureate Thomas J. Sargent and the central bank chiefs of Slovakia, Sri Lanka and the Philippines.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]