Shin Hyun-song’s inauguration as Bank of Korea governor is widely seen as an asset for South Korea’s economic policy establishment. He helped lead global central bank debates at the Bank for International Settlements and has rare experience spanning macro-finance theory and policymaking, fueling high expectations in markets and academia.
But even a top economist is facing a difficult reality at the central bank.
In his first remarks as governor, Shin said the bank must “promote price stability and financial stability through cautious and flexible monetary policy.” The diagnosis is straightforward. The problem is that the economy is presenting the most challenging mix for monetary policy at the same time: upward pressure on prices and downward pressure on growth. After the war in the Middle East, rising international oil prices have increased inflation risks even as the growth outlook has weakened. For a central bank, it is an uncomfortable moment — tighten to curb inflation, or ease to support the economy.
Inflation risks may not have fully surfaced yet. If instability around the Strait of Hormuz persists, higher energy prices could spread across domestic prices with a lag. That is why the fact that inflation remains within the 2% target is not, by itself, a reason for complacency. To anchor inflation expectations, the bank may have to keep the option of raising rates on the table — but that is not a light choice because debt levels are high.
Household lending at the five major banks has turned back to growth this month. Mortgage loans are rising with seasonal spring moving demand, and unsecured credit loans have increased for a second straight month. In particular, credit loans increasingly reflect leveraged stock investing as the Kospi sets record highs, suggesting part of the rally is supported by borrowing. As of the end of March, card loan balances also swelled to a record 43 trillion won. As borrowers shut out of banks shift to high-interest loans, concerns about credit quality are growing.
Delinquency indicators are also worsening. The delinquency rate on won-denominated loans at domestic banks has climbed to its highest level since May last year, and new delinquencies have increased. It is a sign that repayment burdens are rising for both households and companies. Loans are growing while repayment capacity weakens; asset prices are rising while credit quality deteriorates. Market rates have already reflected those risks. Mortgage rates at commercial banks are running about 4.4% to 7.0% for fixed-rate loans and 3.6% to 6.0% for variable-rate loans.
In that context, Shin’s emphasis on “caution” reflects not so much a virtue as a narrow set of options.
In his inaugural address, he also stressed a new view of financial stability, arguing that blurred lines between banks and nonbanks, and between domestic and overseas markets, make it difficult to assess systemic risk using old frameworks. Funding flows that skirt regulatory boundaries — including card loans, off-balance-sheet transactions and nontraditional financial products — have already spread across the market. The core risk now is not a sudden explosion but a gradual buildup, not collapse but distortion.
The challenge is what comes next. Setting a direction and delivering policy success are different matters. What markets are demanding now is less a refined diagnosis than a decision on priorities.
* This article has been translated by AI.
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