'New consumption pattern to slow down inflation'

Bank of Korea Governor Lee Ju-yeol speaks in a press conference at BOK headquarters in Seoul, Thursday. Courtesy of Bank of Korea

By Lee Min-hyung

The consumer price will remain at a near-zero level even after the coronavirus pandemic subsides, as consumers as well as companies are likely to reduce their spending and expand savings in the post-virus world as a precautionary step against the recurrence of such an unexpected external shock, Bank of Korea (BOK) Governor Lee Ju-yeol said Thursday.

During an online press conference, the central bank expected consumer demand in the private sector to recover in a slower-than-expected pace for some time even after the spread of COVID-19 comes to an end, according to the central bank chief.

"The global spread of COVID-19 is expected to have a big impact on economic structures and patterns from subjects of the economy, rather than simply ending up causing an economic downturn," Lee said during the press conference.

"Households and enterprises tend to curtail their debt and increase savings due to concerns over the future after they suffer from economic crisis ― such as the pandemic," he said.

Lee did not share specific predictions over the timeline on when demand will return to a stable track for recovery, only saying the weak demand and low prices will remain in place "for a considerable period of time" after the virus subsides.

The fear of deflation started in September 2019 when the consumer price index slid into negative territory for the first time since the nation began compiling data in 1965.

After hitting a low of minus 0.4 percent at the time, the figure had since risen to 1.5 percent as of January 2020.

But with the pandemic rapidly paralyzing economic activities here in the first quarter of this year, the figure has since nosedived to minus 0.3 percent in May.

Lee predicted the consumer price will stay at around the zero percent range in the latter half of 2020.

The price will go up next year when the fear factor surrounding another international oil price drop will disappear, but it remains to be seen whether the figure will recover to the central bank's market stabilization target of 2 percent, according to Lee.

Pros and cons of expanded liquidity

Lee also shared his views on the central bank's recent expansion of liquidity to the market, saying the step "definitely bore fruit."

"We believe the step to expand market liquidity has generated a definite effect by preventing the real economy from shrinking too excessively," Lee said.

"Coupled with a big cut in the benchmark rate, the expanded liquidity helped companies enhance their environment to raise capital, while at the same time allowing them to borrow money at a lower cost," he said.

Despite the positive side of the central bank's monetary easing and a series of emergent market stabilization measures, the BOK governor also raised concerns over the increasing housing prices here.

"Under the policy stance of monetary easing, the housing prices have recently shown signs of going up, and we are paying attention to the issue with a sense of concern," he said.

But he said the central bank has no plans to change its stance over rising apartment prices in Seoul.

"Given the current economic situation and prices, it is inevitable for us to maintain the monetary easing," he said. "On top of that, the government remains firm in its willingness to stabilize the real estate market. We are going to keep closely watching any movements in the market."

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