Seoul: South Korea's top central banker on Wednesday emphasized the urgent need for economic stimulus to support recovery but warned of "serious side effects" if the government relies too heavily on such measures. Bank of Korea (BOK) Gov. Rhee Chang-yong made the remarks during a speech at a ceremony marking the 75th anniversary of the central bank's founding in Seoul.
According to Yonhap News Agency, Rhee highlighted the necessity of economic stimulus to assist recovery under current circumstances but stressed the importance of preventing a continued decline in growth potential. He advocated for building a resilient economic structure capable of withstanding cyclical fluctuations. Rhee cautioned that an overreliance on stimulus measures due to urgency might result in more significant side effects in the future.
His comments were made as the new Lee Jae-myung administration is in the process of implementing a supplementary budget aimed at supporting livelihoods and stimulating growth. Last month, the National Assembly approved a 13.8 trillion-won supplementary budget, and the government is pursuing additional spending.
While the BOK plans to maintain an accommodative monetary policy for now, Rhee warned that excessively lowering the key interest rate could lead to a rise in real estate prices in Seoul, rather than effectively boosting the real economy. He also expressed concerns about potential volatility in the foreign exchange market, particularly if the interest rate gap between South Korea and the United States widens amid ongoing uncertainties over trade negotiations related to the Donald Trump administration's tariff policies.
Late last month, the central bank reduced its benchmark interest rate by a quarter percentage point and adjusted its 2025 real gross domestic product (GDP) growth forecast from 1.5 percent to 0.8 percent. In response to a query from Rep. Cha Gyu-geun of the Rebuilding Korea Party about the need for an extra budget, the BOK emphasized the importance of swift implementation and improved execution rates to counter sluggish domestic demand.
The BOK noted that while the first round of extra budget spending is expected to have a limited impact on inflation this year, the combined effects of the first and second supplementary budgets could slightly increase inflation next year. Consumer prices rose 1.9 percent in May from a year earlier, marking the first time in five months that inflation fell below the 2 percent threshold. The BOK forecasts consumer prices to increase by 1.9 percent for this year and 1.8 percent in 2026.