BOK report warns of pressures leading to inflation

The Bank of Korea's headquarters in central Seoul [YONHAP]

As the Bank of Korea (BOK) considers an interest rate hike by the end of the year, a team of its researchers released a report Monday saying inflationary forces are growing and there is a need to prevent excessive liquidity.

"There is a possibility inflationary forces driven by the demand side could grow stronger than expected as the country's economy recovers," wrote a central bank team led by Park Kyoung-hoon, a senior economist at the bank's research department.

The report said that while private consumption is already recovering, there is a chance global economic recovery could accelerate it.

Also, idle production capacity that grew with the onset of the pandemic last year, was being reduced from the latter half of last year thanks to the recovery in consumption.

"All these factors make up demand-side inflationary forces, and we expect the forces could grow beyond our expectations if the global economy continues a fast recovery," Park said in a phone interview with the Korea JoongAng Daily, adding an economic stimulus package planned by the government for this year will add to the momentum.

Inflationary pressure is evident from the supply side, the report said.

"Commodity prices slumped in March and April last year, driven by a plunge in oil prices, but have bounced back rapidly," the report said. "Rises in commodity prices affect import prices, which then affect consumer prices."

According to a central bank report last month, a 10 percent rise in international commodity prices could lead to up to a 0.2 percent rise in consumer prices in the following year.

The S&P GSCI index, a widely recognized benchmark for investment in commodity markets, is already up nearly 30 percent since the beginning of the year.

Affected by soaring commodity prices, Korea's import price index in June rose by 14 percent year on year. For 2020 as a whole, the index declined by 8.7 percent.

The report added a massive increase in circulated currency during the pandemic could increase inflationary pressure.

"If [the country] fails to retrieve the increased liquidity at an appropriate time, this could trigger inflation as [liquidity] drives expansion in pent-up demand," the report said. "It is becoming increasingly important to prevent liquidity from increasing excessively, within a level that does not harm economic recovery."

The report contributes to the argument that the central bank should raise interest rates. BOK Governor Lee Ju-yeol said on July 15 that maintaining an accommodative policy stance for too long can lead to greater imbalances in the economy, such as rising debt and asset prices.

BY KIM JEE-HEE [kim.jeehee@joongang.co.kr]