No change in inflation target, Bank of Korea Gov. insists

Finance

Published: 17 Jan. 2023, 18:50

No change in inflation target, Bank of Korea Gov. insists

The Bank of Korea Gov. Rhee Chang-yong speaks at a press conference held in central Seoul on Friday following the Monetary Policy Board meeting. [Yonhap]

Bank of Korea Gov. Rhee Chang-yong wants the central bank to maintain its inflation target — of 2 percent — and is not planning on making an adjustment, at least until inflation falls back to reasonable levels.

Raising the target rate is “the worst solution,” he said Friday during a press conference.

“There should be an adjustment to the base interest rate, not the target” if inflation does not wane, he added.

Korea’s inflation reached 5.1 percent last year, well above the target rate of 2 percent. The central bank forecast inflation to come in at 3.6 percent in 2023.

The 2 percent inflation target is shared by other key monetary authorities, including the Federal Reserve and the Bank of Japan. Rhee said 2 percent is low enough that people don't notice. They start paying attention to inflation when it reaches around 3 percent, he added.

Some economists globally say the central bank should raise the target inflation rate as the rapid interest rate increases has caused economic downturn with higher debt payments and lower consumption.

Olivier Blanchard of the Peterson Institute for International Economics recommended raising the target to 3 percent or even higher.

Customers shop at a discount store in Seoul on Dec. 27. [NEWS1]

Similar voices are being raised in Korea.

“There are concerns that if the central bank is obsessed with the target inflation, the interest rate may be raised excessively,” said Kang Hyun-ju, macro-financial analysis research fellow at the Korea Capital Market Institute. “Structural factors, including the anti-globalization and decarbonization movements, are also pointed to as the reasons the central bank should up the target inflation.”

Under the anti-globalization movement, countries make choices based on political factors, not based on maximizing the production efficiency, like the local chip manufacturing in the United States. This pushes up prices.

The growing environmental, social and governance movement globally has made it difficult for petroleum and chemical companies to invest. So they are reducing the supply to raise the energy prices to generate more income in advance, triggering inflation.

“But it’s not likely for central banks to revise the inflation targets because the act does not match the reason they set the target inflation at the first place,” Kang added.

Inflation targets were set to give people an expectation on how the central bank will practice monetary policy.

Chang Min, senior research fellow of macroeconomic research division at Korea Institute of Finance, said central bank will “lose credibility if it revises the target inflation. There should first be a global consensus on which target rate will be appropriate in the mid-to-long term.”

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