Seoul, June 12 South Korea's top central banker has emphasised the urgent need for economic stimulus to support recovery but warned of "serious side effects" if the government relies too heavily on such measures.
Bank of Korea (BOK) Gov. Rhee Chang-yong made the remarks during a speech at a ceremony marking the 75th anniversary of the central bank's founding in Seoul.
"It is clear that economic stimulus is urgently needed to support the recovery under the current circumstances. But we must also make efforts to prevent the continued decline in growth potential and to build a resilient economic structure that can withstand cyclical fluctuations," Rhee said.
"If we rely too heavily on stimulus measures out of urgency, it could lead to even greater side effects later on," he added.
His comments came as the new Lee Jae-myung administration is working on a supplementary budget aimed at supporting livelihoods and spurring growth.
Last month, the National Assembly approved a 13.8 trillion-won supplementary budget, and the government is currently pursuing an additional round of spending.
While the BOK plans to maintain an accommodative monetary policy for the time being, Rhee cautioned that lowering the key interest rate "excessively" could fuel a rise in real estate prices in Seoul, rather than effectively boosting the real economy.
The governor also warned of potential volatility in the foreign exchange market, particularly if the interest rate gap between South Korea and the United States widens amid lingering uncertainty over trade negotiations on the Donald Trump administration's tariff policies.
Late last month, the central bank lowered its benchmark interest rate by a quarter percentage point, while sharply slashing its 2025 real gross domestic product (GDP) growth forecast from 1.5 percent to 0.8 percent.
In response to a query from Rep. Cha Gyu-geun of the Rebuilding Korea Party regarding the need for an extra budget, the BOK said, "Swift implementation of a supplementary budget and improving actual execution rates are crucial to counter sluggish domestic demand."
The BOK noted that the first round of extra budget spending is expected to have only a limited impact on inflation this year. though the combined effects of the first and second supplementary budgets could slightly push up inflation next year.
Consumer prices rose 1.9 percent in May from a year earlier, marking the first time in five months that inflation fell below the 2 percent threshold.
The BOK forecasts consumer prices to increase by 1.9 percent for this year and 1.8 percent in 2026.
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