Washington: South Korea faces the risk of reaching a point where the central bank can no longer effectively cut interest rates due to population aging, Bank of Korea (BOK) Gov. Rhee Chang-yong said Friday, adding low-interest lending programs, rather than market intervention and quantitative easing, could be a viable option.

According to Yonhap News Agency, Rhee made the remarks during his lecture at the 2025 Michel Camdessus Central Banking Lecture hosted by the International Monetary Fund (IMF) in Washington. He became the first BOK chief to deliver a lecture at the annual event, according to the bank.

"As a newly advanced economy facing rapid population aging, Korea risks reaching the effective lower bound (ELB) in the future," Rhee said. The ELB refers to the level at which, even if rates are pushed toward zero or slightly negative, their additional impact on stimulating the economy is limited.

When a central bank hits the ELB, various unconventional monetary policy (UMP) tools are available, such as quantitative easing, FX intervention and forward guidance, among others. Rhee, however, raised questions about the effectiveness of UMP tools when implemented in South Korea, while warning of potential unintended risks.

"Persistent expectations of depreciation (through FX intervention) could spark capital outflows, potentially causing 'surplus bankruptcy' from dollar liquidity shortages, despite our net creditor status," Rhee said. "Large-scale quantitative easing would more likely fuel real estate inflation than stimulate the real economy, further worsening our already critically low birth rate," he added.

As an alternative, Rhee proposed considering a funding for lending (FFL) scheme. "Central banks provide low-interest funding to private financial institutions, which then channel credit to targeted sectors," he said.

Given that such an ELB risk in South Korea is mainly driven by structural factors such as population aging and a low birth rate, the best policy is "proactive prevention through structural reforms," including measures to boost labor force participation, immigration, and regional development, according to the governor.

"The policy options I suggested today will surely be controversial, but I look forward to the IMF's continued engagement on this critical issue and the development of a richer playbook for policy responses," Rhee added.