South Korean Inflation Galloping At 24-Year High| MENAFN.COM

Wednesday, 10 August 2022 05:35 GMT

South Korean Inflation Galloping At 24-Year High

(MENAFN- Asia Times)

SEOUL – As 2022 proceeds, month by month, Korea is hitting record high after record high. But even for a nation renowned for climbing rankings, setting records and then breaking them anew, the recent record highs are not good news.

A cursory examination of recent headlines gives the gist of the news: On May 3, the Yonhap news wire headlined a story“Inflation growth hits over 13-year high in April amid soaring fuel prices.”

On June 21, a follow-up headline read: “BOK expects 2022 inflation to grow faster than anticipated, hit highest point in 14 years.” Alas, the BOK, or Bank of Korea central bank, was moving too slowly, recent reports have concluded.

By this week, the up-and-up trend accelerated drastically :“S Korea's inflation at 24-year high in June; sharp rate hike in offing,” a Yonhap headline said on July 5.

Korea's consumer price index (CPI) hit 5.4% year-on-year in May, then climbed to 6% in June – hitting the“24-year high” trumpeted in the Yonhap headline. That milestone refers to the most disastrous economic hit Korea has suffered in the modern era: The Asian financial crisis of 1997-98.

Koreans today remember those days (with a shudder) as the“IMF Crisis” – a reference to the then-record US$60 billion International Monetary Fund (IMF) bailout dispensed to rescue the economy, not to mention the harsh belt-tightening and structural reforms that the fund imposed as its blood price for the cash.

Still, by restructuring Korea's banks and disciplining its conglomerates, the IMF granted Korea a recession-proof economy that would not see a year of negative growth until 2020, brought on by the Covid crisis. In 2022, Korea's fundamentals – notably, its corporate leverage ratios, its foreign exchange reserves and its reformed financial system – are solid enough that there is little risk of a repeat of 1997-98.

That's the big picture. But the inflationary beast now appears to be charging faster than the BOK can keep pace. The bank, in its latest forecast, had not anticipated inflation for the year exceeding 4.7%.

The country is a net energy importer and the risk premium the Ukraine War has added to fuel prices is a burden Korea can't readily escape.

In an effort to keep inflation at a manageable level, the central bank has steadily hiked its policy interest rate five times since August 2021, each time by a quarter percentage point.

That benchmark rate currently stands at 1.75%, which offers some room for maneuver. And market chatter has it that at the next board meeting, on July 13, the BOK will put reach for an even higher 0.5% rise.

That would mark a big step for the ever-prudent BOK – indeed, its biggest-ever hike . But even if it takes that big step, it will be milder medicine than the US Federal Reserve is dispensing: The Fed hiked its key rate by 0.75% in June.

There are thus rising fears of capital flight from Korea if the interest rate gap between the two central banks widens further.

Gut check for Rhee

Given Korea's massive levels of household debt, which rose to 106.7% of gross domestic product (GDP) in the third quarter of 2021, any further increase in the debt burden is politically sensitive – leaving the BOK and government to choose between the lesser of two evils.

In a mid-June briefing, BOK Governor Rhee Chang-yong told reporters that the key trend the bank will be seeking to manage with monetary policy is price stability until inflation's upward trend is contained.

That fits with the BOK's latest policy briefing, which hedges but confirms the price-stability direction.

Bank of Korea Governor Rhee Chang-yong has his work cut out for him. Image: Twitter

“The board will continue to conduct monetary policy in order to sustain the recovery of economic growth and stabilize consumer price inflation at the target level over a medium-term horizon, while paying attention to financial stability,” the BOK wrote last month.

“The board sees it as warranted to conduct monetary policy with more emphasis on inflation for some time, as the Korean economy is expected to continue its recovery and inflation to run above the target level for a considerable time.”

But Rhee is being pulled in different directions.

He was parachuted into the hot seat by previous President Moon Jae-in – to the displeasure of then-president-elect and now-President Yoon Suk-yeol, whose transition team reportedly was not consulted on the appointment .

Indeed, Moon told Rhee back in April that his key task was to manage household debt and housing prices. Rhee is no longer beholden to the retired Moon, but the broad political landscape has not changed since the transition, meaning he may face similar pressures from Yoon's team.

Certainly, Rhee knows his stuff. And his prior experience – he is a former head of the Asia-Pacific department at the IMF – suggests he has a sound mind for prudent policymaking.

But a rate hike will not be much appreciated by Korea Inc, either, given that the national economic locomotive – its export sector – is already starting to stutter.

Despite blips, Korea's exports have been on the rise since the pandemic. But in June, exports fell to $57.73 billion from $61.52 billion in May, economic data site Trading Economics shows.

Electronic components, notably semiconductors but including displays as well as finished digital devices, are national core competencies. Sales of all these products shot up during the“work-at-home, play-at-home” pandemic era.

Now, the pandemic is largely over in most export markets, but the world's shaky exit from the Covid era is being hammered by a convergence of factors, including inflationary pressures linked to the Ukraine war; apparently endless Covid-19 restrictions in China; and ongoing kinks in global supply chains and logistic sectors.

None of this is good news for Korea, its consumers or exporters.

Follow this writer on Twitter @ASalmonSeoul


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