Lee Chang-yong, the new governor of the Bank of Korea, took office yesterday. In his inaugural address, Governor Lee said that “the economic recovery will weaken amid rising inflationary pressures.” In this complex crisis situation, the short-term task of the Korean economy was to provide a balanced monetary policy operation, followed by structural reform for private-led growth, resolving polarization, and a soft landing of debt as mid-to-long-term tasks. The plan is to catch the ‘three rabbits’ of price stability, escape from low growth, and improvement in distribution.
The reason why the Governor of the BOK emphasized a policy that encompasses the overall macro economy, which aims for price stability, is because the current crisis is so complex. We are currently in a phase of unprecedented high inflation and low growth, where the collapse of the global supply chain and the Ukraine crisis overlap. As oil prices and parts prices soar, inflation rises and growth potential diminishes, it is necessary to absorb market capital through austerity monetary policy while restructuring the economy to improve its constitution.
Nevertheless, the BOK’s top priority is to catch the soaring inflation due to excessively loose money. The consumer price inflation rate in March exceeded the BOK’s target of 2% and entered the 4% range for the first time in 10 years. As such, if inflation continues for a long time, people who believe that prices will rise further in the future will not only hoard, but also fall into a vicious cycle where product prices rise and demand for a wage increase rises, ultimately reducing corporate competitiveness.
It is highly likely that the BOK will further raise interest rates next month and tighten the reins of austerity. Recently, the International Monetary Fund (IMF) has also expressed concerns regarding the mismatched policy of tightening money chains on one side and loosening money on the other. In a situation where the economy as a whole is suffering from high inflation, the role of the BOK has become more important than ever. Governor Lee must tread the path of this unpopular ‘inflation fighter’ resolutely.