Rate hikes unavoidableInterest rates are finally poised to head up. Bank of Korea Governor Lee Ju-yeol in a briefing on inflation-related policies on Thursday said the loose monetary policy should be normalized in a timely and orderly manner within the year. He said rates need to be normalized in line with the economic recovery. He added that the monetary policy would still be “accommodative” with one or two increases from current record low level.
The rationale for rate increase this year comes amid an inflationary buildup at home and abroad from record fiscal stimuli and excess liquidity to fight the Covid-19 pandemic. If rates remain at the current historic low longer, negative effects from inflated asset values and prices could be the result.
Consumer prices have been rising steeply. The consumer price index rose 2.6 percent on year in May, the most in nine years. The inflation rate in the U.S. hit 5 percent in May. According to price disclosures by Korea Gas, the price of gasoline sold at gas stations across the country averaged 1,591.42 ($1.40) won per liter due to spikes in international oil prices. The central bank projects that strengthening in oil prices that have passed $70 per barrel could last a long time.
Grocery prices also have jumped. Eggs cost 9,000 won per 15, up 84 percent from a year ago. Rent and housing prices have become uncontrollable. Inflation could jump across the board.
The shock to the private sector cannot be small. Private-sector debt has come to overwhelm the gross domestic product by 216.3 percent in the first quarter. The Bank of Korea projects delinquency rate could increase 0.3 percentage point when interest rates go up. Yet the government goes on with the stimuli spree, packaging another 30 trillion won extra budget.
The ruling Democratic Party (DP) wants to hand out universal relief checks through another supplementary budget. The government wants it to go to those in the lowest 70-percent-income cohort. The U.S. and other developed economies have begun tapering. But Korea is out to defy inflationary concerns by going on its way with populist moves ahead of the presidential election next year.
Votes hinge on the economy. The DP was utterly defeated in the April 7 mayoral by-elections in Seoul and Busan due to the failed real estate policy. The government and the DP must seek out wisdom in sync with the monetary tightening momentum.