Bank of Korea Defends Its Stance on Structural Reforms

The Bank of Korea (BOK) has recently been under fire for its advocacy of structural reforms aimed at boosting the nation's economic growth potential. Critics argue that such demands exceed the central bank's traditional mandate of controlling interest rates and prices, suggesting that structural reforms should be the domain of the government or the National Assembly.

Addressing the Critics

In response to the backlash, the BOK published a report titled "Why Does the Central Bank Talk About Structural Reform?" on its official blog. The report, authored by Hwang In-do, director of the Financial and Monetary Research Division, argues that structural reforms are essential for the effectiveness of monetary policy. Hwang emphasizes that without these reforms, the scope for interest rate policy to maneuver is significantly limited.

The Link Between Aging Population and Monetary Policy

Hwang highlights the aging population and low birth rate as critical factors depressing real interest rates. The BOK's analysis reveals that since 1991, aging trends have reduced real interest rates by approximately 1.4 percentage points. This scenario complicates monetary policy by diminishing the room for rate adjustments and increasing fiscal pressures due to rising welfare expenditures.

The Need for Economic Muscle

"Structural reform is about building the economy’s muscles," Hwang states, underscoring the necessity of reforms to strengthen the economy's foundational health and ensure monetary policy's efficacy. The BOK's call for reform is framed as a prerequisite for sustaining economic vitality and policy flexibility in the face of demographic challenges.