[Weekly Review] Lee Ju-yeol Suggests November Base Rate Hike... "KEPCO Deficit Due to Inability to Raise Electricity Prices"

This Week's National Audit of Bank of Korea and KEPCO... Import Prices Hit Highest in 7 Years and 7 Months Due to High Oil Prices

Lee Ju-yeol, Governor of the Bank of Korea, is attending the National Assembly's Public Administration and Finance Committee's audit of the Bank of Korea held on the 15th, responding to questions from lawmakers. Photo by Yoon Dong-joo doso7@

[Sejong=Asia Economy Reporter Kwon Haeyoung] Lee Ju-yeol, Governor of the Bank of Korea, strongly hinted at a base rate hike in November. Import prices soared to the highest level in 7 years and 7 months due to rising international oil and commodity prices. Jeong Seung-il, CEO of Korea Electric Power Corporation (KEPCO), who is expected to face deteriorating business performance due to rising oil prices, stated that KEPCO's financial structure is worsening because electricity rates cannot be raised above cost.

◆ Bank of Korea hints at rate hike in November＝ Governor Lee Ju-yeol said at the National Assembly audit on the 15th, "Based on the current economic flow forecast, I expect there will be no major difficulties even if the base rate is raised in November." The Bank of Korea will hold its last Monetary Policy Committee meeting of the year on November 25. Right after the October MPC meeting where the base rate was held steady, the governor mentioned, "We may consider an additional hike at the next meeting," and his remarks this time were even stronger.

If the Bank of Korea raises the base rate by 0.25%, it will increase from the current 0.75% per annum to 1% per annum. Returning the base rate to 1% would be the first time in 1 year and 8 months since it was lowered to 0.75% in March 2020, right after the COVID-19 outbreak. The market expects the Bank of Korea to raise rates to around 1.5% next year. If the pace of rate hikes accelerates, borrowers' interest burdens are also expected to increase.

◆ KEPCO CEO: "KEPCO's deficit due to lack of rate adjustment"＝ At the National Assembly audit on the 12th, Jeong Seung-il, CEO of KEPCO, explained in response to a question from Shin Jeong-hoon, a member of the Democratic Party of Korea, about the root cause of KEPCO's chronic operating deficit, "A major part is that the cost required for power generation has not been properly reflected in the electricity rates." He also indicated the need for a cost-reflective rate system that is not swayed by political logic for energy supply and demand, beyond just operating deficits.

He emphasized, "We will tighten wherever possible, but it is unreasonable to say that the deficit is due to reckless management," adding, "Oil prices are very closely related to KEPCO's management. Nevertheless, the rates have not been adjusted flexibly according to oil prices."

KEPCO internally expects to record a consolidated deficit of 3.8492 trillion won this year. This is more than 1 trillion won higher than the deficit scale of 2.7981 trillion won during the global financial crisis in 2008, making it the largest loss in history. The cause is rising energy prices. International oil prices surged from the beginning of this year, surpassing $80 per barrel for the first time in 7 years. The government introduced the 'fuel cost adjustment system' last year, which periodically reflects fuel cost increases and decreases in electricity rates, but despite rising oil prices, rates were frozen in the 2nd and 3rd quarters and only reluctantly raised in the 4th quarter.

Jung Seung-il, President of Korea Electric Power Corporation, attended the National Assembly inspection on the 12th held by the National Assembly's Industry, Trade, Energy, Small and Medium Venture Business Committee regarding Korea Electric Power Corporation, and is reporting on business operations. Photo by Yoon Dong-ju doso7@

◆ Import prices hit highest in 7 years 7 months due to high oil prices＝ According to the 'September Export and Import Price Index' released by the Bank of Korea on the 14th, the import price index (provisional figure in Korean won, base year 2015=100) rose 2.4% from 121.61 in August to 124.58 last month. The index itself is the highest since February 2014. The strong import price trend was largely influenced by oil prices. Mineral products rose 5.1%, among which crude oil increased 5.3% month-on-month.

The export price index rose 1.0% month-on-month to 114.18. Coal and petroleum products (6.0%), chemical products (1.4%), and electrical equipment (1.1%) increased compared to August, while computers, electronics, and optical equipment fell 0.5%.

The rise in import prices due to oil price increases leads to a general price increase domestically. Professor Andonghyun of Seoul National University’s Department of Economics said, "When raw material prices rise, companies face higher production costs," adding, "Ultimately, final consumer prices also increase." There is a high possibility that public prices such as electricity and gas rates, which the government restricts from rising to manage inflation, will also increase one after another.

◆ Employment jumps... Has the job market entered 'With-Corona' phase?＝ According to the 'September 2021 Employment Trends' released by Statistics Korea on the 13th, the number of employed persons last month was 27.683 million, an increase of 671,000 compared to the same month last year. The employment increase trend that started in March has continued for 7 months, marking the largest increase since March 2014 (726,000). The overall employment rate for those aged 15 and over was 61.3%, up 1.0 percentage point from the same month last year. Statistics Korea analyzed that the increase in employment and the decrease in unemployed and economically inactive population were due to non-face-to-face digital transformation, export boom, and base effects.

The number of unemployed was 756,000, down 244,000 from a year earlier. The unemployment rate was 2.7%, down 0.9 percentage points, the lowest in 8 years since September 2013 (2.7%) for the same month. The economically inactive population was 16.685 million, down 132,000, marking a decrease for 7 consecutive months since March. On the other hand, vulnerable employment groups such as self-employed and temporary workers still faced difficulties. Among non-wage workers, 'solo entrepreneurs' without employees increased by 22,000, but self-employed with employees decreased by 48,000.