Bank of Korea Chief, Finance Minister Pledge Policy Coordination

(Bloomberg) -- Bank of Korea Governor Lee Ju-yeol and Finance Minister Hong Nam-ki met Friday and pledged tight policy coordination as they sought to reconcile the goals of taming asset bubbles and safeguarding an economic recovery from the pandemic.

“Elaborate coordination and role allocation” between fiscal and monetary authorities to deal with risks latent in South Korea's rapid economic recovery matter more than ever, the central bank and finance ministry said in a joint statement.

A jump in home prices, a boom in risky investments such as cryptocurrencies and a delay in employment returning to pre-pandemic levels are among concerns policymakers are grappling with as South Korea's economy expands at a faster-than-expected pace on the back of strong exports.

The BOK is preparing to raise interest rates and start its exit from pandemic-era stimulus by the end this year as the recovery consolidates. The government meanwhile plans to keep its stimulus rolling, with President Moon Jae-in calling for fiscal spending through next year to lessen the economic disparities stemming from the pandemic.

The BOK chief and the finance minister acknowledged the risks of an asset bubble from prolonged monetary stimulus and that the economic recovery was helping some sectors more than others, according to the statement following their breakfast meeting. The two agreed that fiscal and monetary policies should complement each other.

Government stimulus should be maintained to support growth and consumption while the degree of monetary policy accommodation needs to be adjusted to reduce financial imbalances based on economic conditions, the statement said.

The first meeting between the two policymakers in half a year took place as the latest price data showed inflation staying above the BOK's target of 2% for a third month in June, while slowing for the first time in six months. The result was weaker than analysts had expected.

Consumer prices rose 2.4% from a year earlier, compared with 2.6% in May, as a runup in food and drink costs slowed, data from the statistics office showed Friday.

The slowdown added support to the central bank's argument that recent price data have been boosted by comparison with last year's dismal figures and some inflationary pressures are likely to fade going forward. The BOK sees inflation fluctuating around its 2% target for the rest of the year before sliding lower in 2022.

“The odds are in the BOK's favor, given that the base effects from last year's slump are a major driver,” said Ahn Dong-hyun, a professor of economics at Seoul National University. “But there's also a lot of liquidity out there, which makes it hard to difficult to predict the future trend.”

A 33 trillion won ($29 billion) extra budget proposed by the government this week to provide cash handouts to 80% of South Korean households is a factor that could end up lifting prices. If the stimulus package passes, it would be among the largest since the pandemic hit last year.

What Bloomberg Economics Says

“We expect inflation to moderate gradually heading into the second half of the year. Even so, higher commodity costs and growing demand-side pressures may keep inflation in the upper-1% range through year-end.”

--Justin Jimenez, economist

To read the full report, click here.

Vaccinations have also been accelerating even though they have yet to reach the majority of the population. The latest threat to consumer activity has been the Delta variant of the coronavirus, which prompted authorities to delay plans to ease social distancing rules in Seoul from this week.