“The spread of the new coronavirus infection (Corona 19) and the trend of vaccinations are expected to influence the future economic trend. In particular, the strength of our economy’s recovery depends on how fast consumption recovers. Alleviate until the domestic economy finds stability. I will keep the enemy policy stance.”
Freeze the annual 0.5% interest rate… “Private consumption sluggish due to prolonged distance”
On the 25th, the Bank of Korea held the Financial Monetary Commission (Monetary Commission) in its main building in Jung-gu, Seoul, and unanimously decided to maintain the current rate of 0.5% per year.
Although the domestic economy is showing a gradual recovery due to the recent strong exports, it is judged that a easing monetary policy should be maintained as uncertainties still exist due to the development of Corona 19 and vaccination.
Earlier, the Financial Services Commission lowered the standard interest rate by 0.75%p twice in March and May last year as concerns over the economic downturn in the aftermath of Corona 19.
At a press conference immediately after the Financial Services Commission, Bank of Korea Governor Lee Ju-yeol said, “Although the spread of Corona 19 has slowed around the world, it is showing a slow recovery trend as the movement restrictions by country continue.” It showed a modest recovery, but the euro area was in a slow situation due to the expansion and extension of movement restrictions.”
“The overall recovery trend in Korea is continuing, but it is showing different aspects by sector.” “The export and facility investment increased mainly in IT and semiconductors, but private consumption is sluggish due to the prolonged social distancing.” Explained the background.
“This year’s growth rate of 3.0%…consumer prices are likely to rise slightly”
Accordingly, the Bank of Korea predicted that Korea’s real gross domestic product (GDP) growth rate this year will reach 3.0% and 2.5% next year. It is the same as the forecast released in November last year.
In addition, the Bank of Korea raised its consumer price growth forecast this year by 0.3%p from 1.0% to 1.3%. This is a measure that reflects that food prices have risen due to the worsening weather and the spread of avian influenza, and that international oil prices will continue to rise for some time.
Governor Lee Ju-yeol predicted, “Exports have rebounded rapidly from the second half of last year, and the global conditions are changing favorably due to the distribution of vaccines in major countries and financial stimulus measures, which will be positive for Korea.”
Still, he said, “As the COVID-19 phase prolonged, the consumption of face-to-face services has shrunk significantly, and the income conditions of those who work in this sector have not improved.” did.
In addition, he pointed out, “In the case of the supplementary administration, the expenditure details have not been confirmed, so we did not reflect on the forecast.”
At the same time, Governor Lee Joo-yeol drew a line saying that the inflation rate of the 1% level is not a level to worry about inflation. It is true that there is pressure to increase inflation, but this is why it is necessary to judge whether it will continue as long as the Corona 19 phase continues.
Governor Lee Ju-yeol said, “International raw material prices have risen significantly due to the economic recovery expectations, supply difficulties, and easing monetary policy.” Dismissed.
Of course, he cautioned, saying, “It will take some time for demand to recover in earnest, but there is a possibility that inflationary pressure will increase if repressed consumption recovers.”
“High level of long-term and short-term interest rate difference… Watch out for market conditions”
Along with this, Governor Lee Ju-yeol put out a position that he is paying close attention to the growing difference in interest rates in the short and long term in the financial market.
Governor Lee Ju-yeol said, “As concerns over supply and demand have increased recently, the interest rate of treasury bonds has risen mainly on long-term bonds, and this has greatly widened the interest rate gap in the long and short term. I think it is.”
However, he diagnosed the current situation, saying, “Expanding the long-term and short-term interest rate gap is a common phenomenon in major countries, and it is difficult to determine whether it is at an acceptable level.”
However, he said, “Compared to the past global financial crisis, the difference in recent years is somewhat higher. If the market interest rate rises sharply, the debt burden will increase centered on vulnerable borrowers and the volatility of the asset market such as stocks may increase.” said.
“Digital currency issuance, must be approached carefully”
In addition, Governor Lee Ju-yeol suggested that the issuance of’Central Bank Digital Currency (CBDC)’ should be approached carefully.
Governor Lee Ju-yeol said, “I agree with the opinion that the US Federal Reserve System is more important than doing it quickly,” he said. “The Bank of Korea is also preparing for the issuance of CBDC, and I think it is important to establish an institutional foundation as well as technical issues. I do” he said.
He added, “When introducing CBDC, as many bills besides the Bank of Korea Act need to be supplemented, a thorough procedure must be taken.”
In particular, regarding China’s preparation of the’digital renminbi’, they evaluated that “China is leading the way in issuing digital currencies at the central bank level” and “even if the technical verification is completed, it will take a cautious step until the full introduction.” did.
Full text of monetary policy direction
The Monetary and Monetary Commission decided to operate the monetary policy by maintaining the Bank of Korea’s standard interest rate at the current level (0.50%) until the next monetary policy direction decision.
The global economy continued a slow recovery trend as the impact of the movement restrictions following the re-proliferation of Corona 19 continued. In the international financial market, stock prices and government bond interest rates in major countries have risen due to the expansion of vaccinations and the anticipation of an economic recovery following the new government’s fiscal stimulus measures. In the future, the global economy and international financial markets are expected to be affected by the degree of re-proliferation of Corona 19, the situation of vaccine supply, response to policies in each country, and ripple effects.
The domestic economy continued a gentle recovery trend. Private consumption continued to be sluggish due to prolonged social distancing, but exports continued to be robust, mainly in the IT sector, and facility investment remained on a recovery trend. The employment situation continued to be sluggish, with the number of employed people sharply decreasing. In the future, the domestic economy is expected to continue to recover, centered on exports and investments, but uncertainties related to the speed of recovery appear to be high. The GDP growth rate for this year is expected to show around 3% as expected in November.
The rate of increase in consumer inflation remained in the mid-0% range due to the continued decline in public service prices despite an increase in agricultural and fishery prices. The expected inflation rate for the general public has risen to around 2%. In this year, consumer inflation is expected to rise in the early to mid-1% range, exceeding the November forecast (1.0%) due to rising international oil prices and gradual economic improvement, and the core inflation rate around 1%.
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In the financial market, long-term market interest rates and won-dollar exchange rates have risen due to movements in international financial markets. Stock prices have fluctuated considerably as expectations for an economic recovery and a sense of alertness from short-term surges both affected. Household loans increased, and housing prices continued to rise high in both the metropolitan area and the provinces.
The Financial Monetary Commission will support the recovery of growth in the future, ensure that the inflation rate is stabilized at the target level in the mid-term period, and will operate monetary policy in consideration of financial stability. While the domestic economic recovery is expected to be modest, inflationary pressure on the demand side is expected to remain at a low level, so the monetary policy will continue to ease. In this process, we will closely examine the development of Corona 19 and the ripple effect of policy responses so far, while paying attention to changes in financial stability, such as the flow of funds to the asset market and increase in household debt.