Korea's money supply continues to grow in July

Finance

Published: 16 Sep. 2022, 13:16

Korea's money supply continues to grow in July

Bank of Korea officials deliver cash in Gangnam District, southern Seoul, ahead of Korea’s Chuseok harvest holiday on Sept. 5. [YONHAP]

Korea’s money supply continued to grow in July, largely due to increases in deposits as people flee to safer assets.

According to the central bank, M2 in July grew 8.0 percent on year, led by a strong increase of deposit as people relocate their investment to safer assets amid the rapidly rising interest rate.

The growth has slowed from the 8.8 percent of the previous month. The growth rate has been declining since recording 13.2 percent in December 2021, according to the Bank of Korea.

On month, M2 increased by 0.3 percent, or 3,719.5 trillion won ($2.664 trillion).

M2 is a measure of the money supply that includes all elements of M1 as well as “near money,” such as saving deposits, money market securities and mutual funds that are easily cashable. M1 refers to cash and checking deposits.

In July, installment savings and fixed deposits surged by 21.6 trillion won from the previous month, while money market deposit accounts shrunk by 9.3 trillion won.

Households and non-profit organizations led the growth of installment savings and fixed deposits. Deposits held by companies also grew as their foreign currency deposit increased, the central bank said.

M1 grew 5.3 percent on year, but its growth has continued to fall since 26 percent was reported last February.

On month, M1 was down 1,362.3 trillion won, or 1.0 percent.

A country’s money supply has a significant effect on its interest rates and inflation.

The growth of money supply in Korea along with external factors, including the strengthened U.S. dollar, has accelerated inflation and forced the central bank to rapidly up its base interest rate.

Inflation in Korea was 5.7 percent in August, after reaching 6.3 percent in July, the highest in almost a quarter of a century.

The central bank rapidly raised the rate to 2.50 percent in August from 0.5 percent last July, and signaled there may be additional interest rate hikes to tame inflation.

The Bank of Korea’s Monetary Policy Board has two more meetings to decide on the rate this year. The next meeting will take place on Oct. 12, and again on Nov. 24.

Their decision will be affected by the U.S. Fed’s two-day FOMC meeting, scheduled to start on Sept. 20.

Fed Chairman Jerome Powell reaffirmed his stance in favor of continued monetary tightening during a speech at the Jackson Hole meeting in August, where he said that the central bank will “use our tools forcefully.”

BY JIN MIN-JI [jin.minji@joongang.co.kr