The headquarters of the Bank of Korea in Jung District, Seoul. (Image courtesy of Yonhap)
SEOUL, Sept. 18 (Korea Bizwire) — South Korea could soon face a tipping point where traditional monetary policy loses its potency, Bank of Korea Governor Rhee Chang-yong warned Friday, citing the country’s rapid demographic decline as a structural risk that could push interest rates toward their effective floor.
Speaking in Washington at the International Monetary Fund’s prestigious Michel Camdessus Central Banking Lecture, Rhee became the first BOK chief to deliver remarks at the annual event. He used the platform to issue an unusually candid assessment of the constraints South Korea faces as one of the world’s fastest-aging economies.
“As a newly advanced economy facing rapid population aging, Korea risks reaching the effective lower bound in the future,” Rhee said, referring to the level at which additional cuts in interest rates—even near zero or slightly negative—fail to stimulate growth.
Bank of Korea (BOK) Gov. Rhee Chang-yong speaks to reporters at a hotel in Milan on May 6, 2025. (Image courtesy of the Bank of Korea )
Questioning Unconventional Tools
Central banks that hit the effective lower bound typically turn to unconventional monetary policy—quantitative easing, foreign-exchange intervention, and forward guidance among them. But Rhee cast doubt on whether these instruments would deliver in South Korea’s context, warning that they could trigger destabilizing side effects.
Persistent currency intervention, he argued, might backfire by fueling expectations of depreciation, prompting capital flight and what he called “surplus bankruptcy” from dollar liquidity shortages, despite Korea’s net creditor status. Similarly, large-scale asset purchases risked channeling liquidity into property speculation rather than productive investment.
“Quantitative easing would more likely fuel real estate inflation than stimulate the real economy, further worsening our already critically low birth rate,” Rhee said, linking monetary excess to broader social strains.
South Korea Faces Rising Economic Risk from Aging Self-Employed Population (Image supported by ChatGPT)
Exploring Alternatives
Instead, Rhee suggested South Korea consider a funding-for-lending (FFL) model, in which the central bank provides low-interest funding to private financial institutions that direct credit into targeted sectors of the economy. The approach, tested in other advanced economies, could offer a way to support growth without distorting asset markets.
But ultimately, Rhee emphasized, monetary policy alone cannot resolve Korea’s long-term challenges. Structural reforms—raising labor force participation, embracing immigration, and fostering regional development—are needed to counterbalance the drag of a shrinking, aging population.
“The best policy is proactive prevention through structural reforms,” he said. “The options I suggested today will surely be controversial, but Korea must prepare for an era where conventional levers are less effective.”
South Korea is now experiencing rapid population aging, with the number of people aged 65 and older surpassing 10 million. (Yonhap)
A Broader Warning
Rhee’s remarks reflect a growing recognition among central bankers that demographic pressures—rather than cyclical downturns—may increasingly dictate the boundaries of monetary policy. With South Korea’s fertility rate at the lowest in the world and its working-age population already in decline, the BOK chief’s warning carries significance beyond Seoul, highlighting the challenges advanced economies face as they age.
M. H. Lee (mhlee@koreabizwire.com)
