Preemptive action against inflationInflation is quickly up in contrast to a year ago, when there were concerns about deflation. The consumer price index in April gained 2.3 percent from a year ago, the strongest since August 2017. The number exceeds the Bank of Korea’s mid- to long-term target of 2 percent. Inflation not just pains households due to higher living costs, but also can bring about a rate hike that could unsettle the country’s colossal private debt load.
Household debt that exceeded 1,000 trillion won ($889 billion) in 2011 has nearly doubled in just a decade. Of bank household loans, 70 percent has been lent on floating rates. Indebted households would have to pay more interest if rates go higher. Liquidity has become lush since the policy rate came down to 0.5 percent in May last year after back-to-back cuts of 75 basis points from 1.25 percent amid the spread of Covid-19.
Young people have turned to borrowing to buy houses, stocks and cryptocurrency. If stocks or digital coins tumble, they could cause major social problem. The monetary policy board of the Bank of Korea (BOK) said that economic players should be cautious and ready against “vulnerability of rates going higher.”
But the government is laidback. It claims the first-half inflationary acceleration is only “temporary” as the figure just looks high due to the nearly zero percent increase in the year-ago period amid the outbreak of Covid-19. Even considering the base effect, the jump in prices has been too big. On top of strong farm, fishery and livestock prices, commodity prices, including crude oil, doubled against a year-ago. Inflation could speed up when economic recovery is coupled with pent-up spending.
BOK chief Lee Ju-yeol maintained that the bank would hold up its accommodative rate policy despite improving signs in the Korean economy. U.S. Treasury Secretary and former Fed chief Janet Yellen said that interest rates may have to rise “somewhat” to keep the economy from overheating, while adding that she was not “predicting or recommending” rate increases.
Fixing interest rates is a decision that falls entirely under the Federal Reserve. But many experts believe she was sending a warning message of conditions for a tightening environment as the U.S. economy is estimated to grow 7 percent this year amid rapid vaccination. Instead of sticking to the theoretical perspective, our financial authorities must keep close tabs on price movements and act preemptively against inflationary dangers.