Rhee: Monetary policy alone cannot ensure stability

Chang Yong Rhee, Governor of the Bank of Korea, delivered his farewell address, reflecting on four years marked by global shocks and significant policy responses. He emphasized the growing need for structural reforms beyond monetary and fiscal policy.

Navigating a storm of unforeseen shocks

Governor Rhee's four-year tenure at the Bank of Korea was defined by a series of global and domestic shocks.

The Bank raised its Base Rate to 3.5 percent, including two "big-step" increases, to counter accelerating global inflation post-Russia-Ukraine war.

Financial stability risks emerged from real estate market unrest and the Silicon Valley Bank failure.

Domestically, political uncertainty, US tariff shifts, and Middle East tensions contributed to economic contraction and exchange rate volatility.

Rhee expressed pride in bringing inflation back to the 2 percent target ahead of other major central banks.

Achievements included Korean-style forward guidance, over twenty structural reform reports, and reversing the household debt ratio's two-decade-long upward trend.

He also chaired the BIS Committee on the Global Financial System.

Beyond monetary and fiscal limits

Governor Rhee emphasized the growing difficulty of achieving economic stability and growth through monetary and fiscal policy alone.

He noted that structural changes have eroded the effectiveness of traditional tools, creating a widening gap with public expectations.

The foreign exchange market illustrates this: capital flows are now driven by domestic actors and a complex interplay of various factors, not just interest rate differentials.

Managing the exchange rate solely through market intervention and interest rate policy, without accompanying institutional reforms, risks generating greater distortions.

Rhee reiterated his view that structural reforms are essential for monetary policy effectiveness.

A central bank's evolving mandate

Rhee's address highlights the evolving role of central banks in a complex global economy.

He argues that traditional monetary and fiscal tools alone are insufficient for stability and growth, necessitating broader structural reforms.

This perspective is vital for central banks worldwide, facing challenges that demand a holistic approach beyond conventional policy.