High liquidity rates creating economic policy challenges

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High liquidity rates creating economic policy challenges

Published: 04 Dec. 2025, 07:00

Audio report: written by reporters, read by AI

An employee organizes won and dollars at Hana Bank’s Anti-Counterfeiting Response Center in central Seoul on Nov. 25. [NEWS1]

Korea faces an economic slowdown that calls for expansionary fiscal policy, but the government has to navigate a market that is already saturated with record levels of liquidity. The excess cash pushes up inflation risks, weakens the won and deepens the gap between policy rates and market rates, complicating the government’s next steps.

Korea’s broad money supply (M2) reached 4.4 quadrillion won ($2.9 trillion) in September, the largest amount on record, according to the Bank of Korea (BOK) on Monday. M2 rose 8.5 percent from a year earlier, entering the 8 percent range for the first time since July 2022, during the Covid-19 pandemic.

Demand deposits increased by 9.5 trillion won in a month, while transferable savings deposits rose by 6.8 trillion won and investment funds by 5.7 trillion won.

“Liquidity accumulated during the Covid-19 pandemic through extra budgets, combined with heavy inflows into the stock market," a BOK official said. “A record current account surplus also contributed to greater won liquidity.”

Analysts say the Lee Jae Myung administration’s expansionary fiscal policies added to the increase.

Baek Yoon-min, a researcher at Kyobo Securities, said the government circulated substantial funds through programs such as consumer coupons, government-funded coupons designed to encourage people to spend more and stimulate the economy.

“Investment and lending also increased during the rate-cutting cycle, which raised M2 further,” Baek said.

A market official who requested anonymity said tighter real estate regulations shifted capital toward overseas markets.

An electronic board displays exchange rates at a private currency exchange shop in central Seoul on Nov. 23. [YONHAP]

“Some investors decided it was better to buy more U.S. stocks instead,” the official said.

The surge in liquidity has fed into foreign stock investments, which pushed up demand for dollars and deepened weakness in the won. The won-dollar exchange rate recently hovered around the upper 1,470-won range and now threatens to surpass 1,500 won.

“Rising liquidity could encourage investors to take on more risk in global financial markets after a time lag," said Kim Wi-dae from Korea Center for International Finance. “Past cases show that when liquidity increases, it can later act as a driver of risk appetite in global markets.”

Yonsei University professor emeritus Kim Jung-sik warned that fiscal-driven inflation could build momentum.

“The government continues to inject money this year and plans to do so again next year, which raises inflationary pressure,” Kim said. “As prices rise, the increased money supply weakens the currency.”

Economists say the greater challenge lies in not knowing where excess liquidity will go next, which complicates policymaking.

Real estate remains vulnerable despite government controls. A study by the Korea Development Institute found that when M2 increased 1 percent, the GDP deflator (the average price of all new, domestically produced goods and services) rose 0.5 percent over eight quarters. However, housing prices rose 0.9 percent over four quarters, reacting nearly twice as quickly and twice as twice as strongly as broader inflation.

The gap between policy rates and market rates continues to widen as the government prepares a large-scale bond issuance next year. Monetary policy alone cannot fully manage market rates under those conditions.

The BOK cut its base rate from 3.0 percent at the beginning of the year to 2.5 percent recently, but yields on 10-year government bonds rose 0.59 percentage points over the same period, signaling a fall in bond prices.

A currency exchange shop in central Seoul displays its exchange rates on Nov. 30. [YONHAP]

“The government has limited room to intervene in monetary or exchange-rate policy, leaving fiscal policy as its main tool," said Park Hyung-jung, an economist at Woori Bank. “Expansionary fiscal policy reflects the new administration’s philosophy.

With structural problems like a high exchange rate emerging, the government needs medium- and long-term policies to ease issues such as the low birthrate, demographic change and declining potential growth.”

Baek, a researcher at Kyobo Securities, agreed.

“A high exchange rate largely reflects a loss of confidence in the won,” Baek said. “Fiscal spending should focus on raising potential growth.”

BOK Gov. Rhee Chang-yong said recently that the current M2 growth mainly reflects liquidity accumulated in past years rather than newly injected funds.

“New liquidity remains limited and under control,” Baek said. “Korea’s M2 includes investment funds such as ETFs, unlike the IMF’s recommended definition. If we exclude them, the year-on-year growth rate is closer to 5.5 percent.”

Kim Yong-beom, presidential chief of staff for policy, also downplayed concerns.

“The growth in M2 is not the result of government fiscal expansion, including the issuance of consumer coupons," Kim said. “Bond yields have risen recently because expectations about future interest rates differ.”

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
BY PARK YU-MI [[email protected]]