Economist Ho Woei Chen at UOB Group recently reviewed the latest monetary policy meeting by the Bank of Korea (BoK). The key takeaways from the meeting provide some insights into the current state of the South Korean economy, as well as potential areas of focus for future policy.
First, the Monetary Policy Board of BoK decided to maintain its base rate unchanged at 0.50%, which is in line with consensus expectations. This move comes after a series of easing measures by the bank throughout 2020 in response to the coronavirus pandemic.
South Korea’s economy has been relatively resilient compared to many other countries throughout the COVID-19 pandemic, thanks in part to a rapid public health response, coupled with fiscal stimulus measures and targeted relief for affected businesses and households. Although recent developments, such as a third wave of infections and vaccine rollout challenges, have dampened growth prospects, the BoK believes its current monetary policy support level remains appropriate at this time.
Second, the board noted that economic growth in South Korea has continued to display a moderate recovery trend. Although consumption remains sluggish due to rising unemployment rates and social distancing measures, the country’s exports have been buoyed by an upswing in demand for semiconductors and automobiles. This increase in exports aligns with the rebound observed in global trade, as countries around the world look to recover from the economic impacts of the pandemic.
In addition, investment in construction and facilities has improved somewhat. This trend can be attributed to the South Korean government’s efforts to stimulate the economy, including various infrastructure projects that were fast-tracked to provide an immediate economic boost. However, uncertainties remain, particularly as the pandemic continues to evolve and the pace of vaccine distribution remains below expectation.
Third, consumer price inflation has remained relatively low, hovering around the 1% mark. However, Ho Woei Chen highlights that the board expects inflationary pressures to gradually rise, given factors such as increases in international commodity prices and demand recovering in specific industries. Furthermore, changes to housing transaction restrictions could impact the market and contribute to inflation pressures.
The BoK emphasized that it will continue to closely monitor factors that could impact inflation, such as wage trends and global economic conditions, as well as undertaking efforts to maintain price stability in the face of potential inflationary pressures.
Fourth, the central bank acknowledged the need for financial stability in its policy considerations, particularly in light of the risks posed by elevated household debt levels in South Korea. The country has experienced a significant increase in household borrowing in recent years, fueled by low interest rates and demand for mortgages.
While the BoK has introduced macroprudential measures, such as debt-to-income and loan-to-value limits on mortgage loans, there are concerns these measures have fallen short in curbing the rise in household debt. As a result, the bank is likely to remain cautious in its approach to future policy decisions, balancing the need for economic support with the risks associated with growing household debt.
Fifth, the board stressed the importance of fiscal policy. It indicated its intention to continue close coordination with the government in providing necessary support to the national economy. In this regard, the South Korean government unveiled a KRW 470 trillion (USD 420 billion) budget for 2021 in December 2020. This budget aims to provide support for vulnerable groups, promote economic growth and accelerate job creation.
Moving forward, the South Korea is expected to take a prudent approach to ensure macroeconomic and financial stability. Ho Woei Chen believes that the BoK is likely to maintain its policy rates for the foreseeable future, barring any significant changes in the pandemic-related conditions or inflation dynamics.
However, the BoK will have to navigate a complex landscape over the coming months, balancing the ongoing pandemic concerns with the need to support economic recovery and manage risks emanating from high household debt levels. Additionally, an eye needs to be kept on the evolving global trade environment; as a highly export-dependent economy, South Korea cannot afford to neglect the impact of the international arena on its economic health.
To sum up, the BoK’s latest policy meeting highlights the delicate balancing act facing the central bank as it navigates the twin challenges of supporting economic recovery while maintaining financial stability. In the near term, the focus is expected to be on promoting growth by maintaining accommodative monetary policy and working in tandem with fiscal policy efforts. However, the bank is likely to remain cautious, with an eye on the risks associated with household debt and inflationary pressures in the medium to long term.
