[Monetary Credit Policy Report] "Rising House Prices Lead to Increased Money Supply Growth... Liquidity Increase at Risk Level"

Bank of Korea Issues Monetary and Credit Policy Report
"Significant Increase in the Influence of Asset Factors Such as Housing Prices"

[Asia Economy Reporter Jang Sehee] The broad money supply (M2, average balance) growth rate, which indicates the amount of money circulating in the market, has recently risen rapidly. It has been analyzed that the influence of asset factors such as housing prices has significantly increased compared to real factors like growth and inflation.

On the 9th, the Bank of Korea announced through the Monetary Policy Report (December 2021), approved at the Monetary Policy Committee meeting, that the recent rise in the money supply growth rate was analyzed as such.

The M2 growth rate slowed somewhat to the 9% range in the second half of last year but surpassed 10% earlier this year and has been expanding to 11-12% in the second half. After recording 10.1% in January this year, it has maintained a double-digit growth rate for nine consecutive months. The Bank of Korea stated that this money supply growth significantly exceeds the nominal Gross Domestic Product (GDP) growth rate, which represents real economic activity.

The Bank of Korea explained that the estimation of the money demand function showed that the M2 growth rate has continuously deviated from the long-term equilibrium level since the COVID-19 crisis. However, the gap from the long-term equilibrium has gradually widened since last year but has somewhat narrowed recently as domestic economic growth has strengthened.

The Bank of Korea analyzed that asset price factors such as housing prices had a large impact. Real estate investment driven by borrowing continued, leading to an increase in loans. However, this year, it is estimated that the contribution of real factors has also increased significantly based on favorable economic growth.

Looking at the money supply channels, the high growth of private credit led the money supply. The private credit sector showed the highest contribution as corporate credit continued to grow strongly, and the household sector's contribution also expanded significantly compared to last year.

The government sector increased credit supply due to increased issuance of government bonds from fiscal expansion and early budget execution, and increased investment in government bonds by deposit-taking institutions.

The foreign credit sector's contribution expanded as the current account surplus continued, supported by the ongoing global economic recovery and rising export prices, along with increased foreign securities investment.

Meanwhile, a distinct differentiation appeared in the tendency of holding monetary assets between households and corporations. Households used non-monetary assets such as stocks and real estate, resulting in a credit growth rate higher than the household M2 growth rate. Corporations increased the management of monetary assets such as performance-dividend products, causing the corporate M2 growth rate to exceed the credit growth rate.

The Bank of Korea emphasized, "The heightened profit-seeking tendency of economic agents, combined with expectations of asset price increases, has greatly expanded money demand due to asset price factors," and warned, "If the upward trend in money supply growth continues, excessive capital inflow into the asset market may occur, so caution is necessary."