Recession possibility mentioned, briefly, by Bank of Korea governor

Bank of Korea Gov. Rhee Chang-yong speaks at a press conference held to discuss inflation in central Seoul on Tuesday. [NEWS1]

Korea might be nearing a recession, Bank of Korea Gov. Rhee Chang-yong said during a press conference held in central Seoul on Tuesday.

Whether or not we are “headed toward a recession, it’s borderline,” the central banker commented.

Based on the wording of his statement, the timing of a possible recession is not clear.

“The economic situation in the first half of next year is projected to be difficult,” Rhee noted.

The implementation of central bank policy to tame inflation could “aggravate the recession” if the bank responds too late, but market trust could be lost if the bank responds too early, he added.

The banker said he is taking into consideration the economy, the exchange rate and employment.

The Bank of Korea projects Korea’s economy to grow 1.7 percent in 2023 – 1.3 percent in the first half and 2.1 percent in the second half.

Rhee made the remarks at a conference held to discuss inflation this year and projections for next year.

Inflation was 5.1 percent through November this year. Annual inflation is projected to be the highest since the 7.5 percent recorded in 1998.

Inflation hit 6.3 percent in July, but gradually weakened to 5.0 percent last month following a slowing in the rise of energy and agricultural product prices.

Oil price surged following Russia’s invasion of Ukraine in February, while those of agricultural products jumped as a result of heavy rainfall over the summer.

China’s relaxation of zero-Covid policies could also stimulate inflation.

If China successfully relaxes the regulations, the country’s economy could recover quickly and drive up commodity prices. But if the pandemic spreads and slows China’s recovery, energy prices may fall further.

The price of West Texas Intermediate on Tuesday was $75.5, down from around $120 in March.

Rhee said the inflation rate will continue in the 5-percent range.

“Monetary policy will have to be adjusted based on inflation, as inflation is projected to exceed the target inflation of 2 percent.” But Rhee added inflation is expected to gradually decline next year.

Inflation remains uncertain given the volatility of energy production, sanctions on Russia and inflation expectations.

Rhee also noted that it is too early to discuss rate cut at this point and that the Monetary Policy Board will need more clear evidence of declining inflation in the mid-to-long term before they start discussing a cut.

Rhee will discuss the issues more “with Monetary Policy Board members in January as we have not yet had a discussion following this month’s Federal Open Market Committee meeting.” He added, “But the majority opinions in the Monetary Policy Board meeting in January said it is too early to start discussing the rate cut.”

The Bank of Korea raised the base interest rate to 3.25 percent in November, up from 0.50 percent in July last year.

The U.S. Fed slowed the rate increase earlier this month to half a percentage point after raising it by three-quarters of a point for four consecutive times through November. The federal funds rate now ranges between 4.25 to 4.50 percent.

The Bank of Korea will not “mechanically” follow the footsteps of the U.S. federal funds rate, but will take it into consideration because of its impact on the exchange rate and the flow of funds, Rhee said.

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