An analysis suggests that to overcome the limitations of monetary policy due to aging, it is necessary to improve the real estate-centered financial structure and take practical measures to enhance productivity and restore fertility rates.
The Economic Research Institute of the Bank of Korea, in its report published last month titled 'Changes in Monetary Policy Conditions and Implications due to Hyper-Aging', analyzed the impact of population aging on real interest rates, economic growth rates, and financial market soundness.
The report notes that Korea entered the hyper-aged society last year-end, with the population aged 65 and over exceeding 20% of the total population. Aging leads to a decrease in labor supply and increased savings, lowering real interest rates and causing structural constraints such as growth rate slowdown and expanded financial risks.
Specifically, the analysis suggests that if the fertility rate and life expectancy from 1991 had been maintained, the real interest rate in 2024 would have been about 1.4 percentage points higher. Aging is a major factor in lowering real interest rates, which can reduce the central bank's interest rate operation margin and decrease the effectiveness of monetary policy.
Additionally, aging exerts downward pressure on prices. The report forecasts that population structure changes will lower the inflation rate by an average of 0.15 percentage points annually from 2025 to 2070.
Warnings were also raised from a financial stability perspective. Aging leads to decreased profitability and lower capital adequacy ratios for financial institutions, weakening bank soundness. Particularly, financial institutions overly dependent on real estate loans are exposed to greater risks.
To respond to these structural changes, the report emphasized structural reforms to improve the fundamental structure of the real economy and financial markets, rather than short-term economic stimulus measures. Proposals include expanding economic participation of women and elderly, improving housing and childcare conditions for youth, technological innovation and productivity enhancement, reducing real estate financial dependence, and strengthening foreign exchange market resilience.
The report specifically analyzed that if the fertility rate recovers to the OECD average, elderly employment expands, and productivity increases by 0.5 percentage points, real interest rates and growth rates could increase by more than 1 percentage point on average.
Furthermore, the report added that to enhance monetary policy effectiveness in the changed environment, it is necessary to continuously refine open market operation systems and design sophisticated policy communication with the market. Organic linkage between monetary policy and macroprudential policy was also presented as an important response measure.
