An optimal and harmonious mix of fiscal and monetary policies is crucial to speeding up the country's economic recovery and regaining financial stability. That's why Economy and Finance Minister Hong Nam-ki and Bank of Korea (BOK) Governor Lee Ju-yeol met Friday to discuss how to realize this shared goal.
The meeting, the first of its kind since December 2018, came amid concerns that the ministry's expansionary fiscal policy runs counter to the central bank's move toward monetary tightening. To downplay such concerns, Hong and Lee shared the same view that it is desirable for the ministry and the BOK to operate fiscal and monetary policies in a mutually complementary manner in accordance with the economic situation.
Minister Hong has supported the BOK's plan to raise its key interest rate, while committing to fiscal expansion for the time being. This means that the government is recognizing the need for a rate hike because the accommodative monetary policy, which was designed to cope with the economic fallout from the COVID-19 pandemic, has caused serious side effects such as property speculation and rising inflation.
Gov. Lee has continued to hint at increasing the interest rate. In late June, he became more specific by saying the central bank is ready to raise the key rate “within this year” to orderly normalize its monetary policy as the economy is on a solid recovery track. The Korean economy grew by 1.7 percent in the first quarter of the year, boosted by booming exports and reviving consumption.
Last Monday, the economy ministry revised up its 2021 economic growth projection to 4.2 percent, much higher than its December prediction of 3.2 percent. The figure is in stark contrast to last year's economic contraction of 0.9 percent. If the outlook is correct, the economy will enjoy its highest growth rate since 2010 when it expanded 6.8 percent.
Such a fast recovery is more than welcome. However, the nation has to pay the price for fiscal and monetary easing which has caused excessive liquidity, increased inflationary pressure, ramped up household debt and formed bubbles in housing and stock markets.
Despite these negative factors, the Moon Jae-in administration proposed a second extra budget of 33 trillion won ($29 billion) for this year to provide coronavirus relief aid to people in the bottom 80 percent of the income bracket and small business operators hit by the pandemic. The government has drawn criticism for going too far in fiscal expansion in a bid to woo voters before the March 2022 presidential election.
The consumer price index jumped 2.6 percent year-on-year in May and 2.4 percent in June, exceeding the BOK's annual inflationary target of 2 percent. Household debt hit a record high of 1,765 trillion won ($1.55 trillion) in March; and if the housing bubble bursts suddenly, the country could face another financial and economic crisis. Fiscal and monetary policies should go hand in hand to prevent such a worst-case scenario.