KDI slams BOK for neglecting price stabilization

The Korea Times

The Korea Times

Finance

Tue, September 26, 2023 | 20:31

Policies

KDI slams BOK for neglecting price stabilization

Posted : 2019-10-28 16:37

Updated : 2019-10-29 18:12

Korea Development Institute fellow Jung Kyu-chul speaks during a press conference at the Government Complex Sejong, Monday. / Yonhap

By Park Jae-hyuk

The Korea Development Institute (KDI) slammed the Bank of Korea (BOK), Monday, for "neglecting" its main duty of price stabilization to ensure financial stability.

The state-run think tank even called for the exclusion of "financial stability" from the BOK Act to urge the central bank to place a top priority on price stabilization in the future.

The criticism came amid growing concerns that the local economy is heading for deflation with consumer prices falling in September for the second consecutive month.

Jung Kyu-chul, a KDI fellow who published a report on recent price trends, told reporters at a press conference that the BOK's monetary policy has not prioritized price stabilization over the past few years.

"Even if the inflation rate continues to fall short of its target, the BOK cannot prioritize price stabilization, unless financial stability is secured," he said. "If both duties are needed at the same time, the BOK will be unclear about the direction of its monetary policy."

Citing price stabilization as the central bank's most important duty, he said financial stability should not be taken into account any more in devising monetary policies.

The BOK has had to "take heed of financial stability in performing its monetary and credit policies," since the BOK Act was amended in 2011 after the in 2008 global financial crisis.

As a result, the KDI claimed that the central bank has been reluctant to cut key rates despite the sluggish economy, in order to curb rises in household debt.

"The BOK had room for rate cuts in November last year, as inflation was low and the economy was slow at that time," Jung said. "But it raised the key rate instead because household debt was rising."

The researcher also differed with the government in analyzing the cause of the recent trend of decreasing prices.

Although he agreed that the recent trend cannot be defined as deflation, he cited a demand-side shock as the main reason for falling inflation, implying that private consumption and corporate investment have decreased.

"The fact that both the inflation and growth rates have fallen throughout this year indicates that the demand-side shock was more powerful than the supply-side shock," he said. "If a supply-side shock caused the low inflation rate, the growth rate would have moved in the opposite direction."

The government cited a supply-side shock as the main reason for decreasing prices.

Vice Finance Minister Kim Yong-beom said earlier in October that falling inflation was attributable to drops in agricultural products and oil prices, and free education for high school students.

Jung, however, refuted this claim, saying the falling inflation rate this year was not a result of the government's welfare policies or prices of certain products.

pjh@koreatimes.co.kr