Bank of Korea warns of deepening inflationary pressures

Bank of Korea Governor Lee Ju-yeol speaks during a meeting with economists at the Plaza Hotel in Seoul, Thursday. Courtesy of Bank of Korea

By Lee Min-hyung

The Korean economy will continue to be exposed to escalating inflationary pressures due to external risk factors on global supply chain disruptions and international oil price hikes, Bank of Korea (BOK) Governor Lee Ju-yeol said Thursday.

“Consumer prices will be on the rise for the time being at a higher-than-expected rate amid global supply bottlenecks, oil price increases and rising demand-pull inflationary pressures,” Lee said during a meeting with seven economists from private research organizations.

The central bank chief also emphasized the difficulties in mapping out policies due to such widening uncertainties.

“For instance, the supply bottlenecks have emerged as a big risk factor around the globe, but it is hard for us to predict when they will be alleviated,” Lee said. “As a monetary authority that has to carry out policies with a future-oriented viewpoint, one major difficulty is the unknowable uncertainties.”

According to recent data from Statistics Korea, consumer prices soared year-on-year by 3.2 percent in October. This was the biggest rise in about a decade since January 2012. This pushed the BOK to readjust its inflation projection this year to a higher level than the 2.1 percent forecasted earlier.

Given Lee's repeated remarks on the economy's increasing inflationary fears, the BOK is expected to raise the benchmark interest rate by 25 basis points during a rate-setting meeting on Nov. 25.

The central bank had frozen the key rate for more than a year during the pandemic shock, until pushing for a rate hike in August this year for the first time since May 2020.

With the BOK governor sending repeated signals for the rate hike, most economists expected the central bank to raise the rate once again to 1 percent during the upcoming monetary board meeting.

Despite the inflationary pressure, Lee remained optimistic over the pace of economic recovery here due to robust exports and eased quarantine rules.

“Economic growth faltered in the third quarter due to the aftermath of global supply disruptions,” he said. “But exports continued to report solid growth, and domestic consumption rapidly improved on the alleviated quarantine rules.”

On the same day, the Korea Development Institute (KDI) revised up Korea's GDP growth projection this year to 4 percent from an earlier forecast of 3.8 percent. It also expected the economy to achieve a 3 percent growth next year.

The outlook reflected on the economy's recovery in exports and equipment investment. The research institute also expected domestic consumption to be on the path for stable recovery next year.

The 4 percent growth forecast by the KDI is on par with the BOK's prediction. The International Monetary Fund and the OECD also expected the Korean economy to achieve 4.3 percent and 4 percent growth this year, respectively.

“We have revised up our forecast on private consumption on the government's supplementary budget execution, but lowered growth outlook for export and construction investment due to the prolonged global supply disruptions and raw materials price hikes,” Jung Kyu-chul, chief of the KDI's economic outlook division, told reporters during a recent briefing.

The service industry will be able to achieve a rapid rebound and help contribute to economic recovery if the social distancing rules continue to be relieved in phases, but the manufacturing sector is unlikely to make a great contribution to the economy unless the global supply shock comes to an immediate end, according to Jung.