Bank of Korea Governor Rhee Warns of Debt, Aging Risks

(Bloomberg) -- Bank of Korea Governor Rhee Chang-yong highlighted rapidly rising private and public debt and an aging population as threats to South Korea’s economic outlook in his inauguration speech.

Rhee took office Thursday after being nominated by President Moon Jae-in almost a month ago. He has so far expressed support for higher interest rates to rein in inflationary pressures while pointing to economic risks from the war in Ukraine, China’s virus lockdowns and the Federal Reserve tightening.

“We know from past experiences that should a continued expansion in debt lead to a sudden collapse in the bubble, it can cost the society enormously,” Rhee said in a central bank transcript. “As the BOK pursues macroeconomic stability, it inevitably has to have an interest in soft-landing the debt issue.”

While South Korea’s ratio of debt to gross domestic product remains among the lowest in the developed world, it has seen government and household borrowing balloon in the low-rate and free-spending environment of the pandemic. The BOK has been in the vanguard of central banks tightening policy, hiking its key rate last week by a quarter-percentage point to 1.5%.

South Korea’s aging demographics may also lead to “secular stagnation” that needs to be dealt with through structural reforms, said Rhee, who previously served as a senior official at the International Monetary Fund.

Rhee will attend his first policy meeting on May 26. Economists surveyed by Bloomberg expect the BOK to hike rates in the third quarter of this year and the first quarter of 2023.

There’s a “trade-off” between inflation and economic growth, which reduces the room for the central bank to maneuver with its monetary policy, Rhee added.

©2022 Bloomberg L.P.