[Weekly Review] Base Interest Rate Up 0.25%p... Warning of "Expanding Inflation Trend"

Annual Consumer Price Inflation Forecast at 4% Range
The Return of the Ministry of Economy and Finance's Heyday
Government Approves 'CPTPP Accession Proposal'

Joo Sang-young, Acting Chairman of the Monetary Policy Committee, is presiding over the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 14th. 2022.04.14. Photo by Joint Press Corps

The Bank of Korea tightened monetary policy by raising the base interest rate again after three months since January, despite the governor position being vacant. As a result, the base rate returned to 1.50% per annum, the pre-COVID-19 level from July 2019.

On the 14th, the Monetary Policy Board of the Bank of Korea held a meeting to decide the direction of monetary policy and announced a 0.25 percentage point increase in the base rate from 1.25% to 1.50% per annum. Previously, on March 17, 2020, anticipating an economic recession due to the COVID-19 pandemic, the Monetary Policy Board cut the base rate by 0.50 percentage points at once and further reduced it by 0.75 percentage points within two months through an additional cut on May 28 of the same year.

Annual Consumer Price Inflation Expected to Reach 4%

After nine consecutive holds, the Bank of Korea signaled 'normalization of monetary policy' by raising the rate by 0.25 percentage points on August 26 last year, the first increase in 15 months. Since then, the base rate has been raised four times by 0.25 percentage points each in November last year, January this year, and on this day, totaling a 1.00 percentage point increase over about eight months.

The problem lies in the expectation that inflation will rise further. Unless there is a significant turnaround, concerns are growing that the annual consumer price inflation rate could soar to the 4% range while the economic growth forecast may fall to the 2% range.

Another factor cited for the base rate hike is the possibility that the U.S. Federal Reserve may implement a 'big step' by raising rates by 0.5 percentage points at once as early as May to curb inflation.

Joo Sang-young, acting chair of the Monetary Policy Board, said, "This year, the domestic gross domestic product (GDP) growth rate is expected to slightly underperform the February forecast (3%), and consumer prices are likely to continue a high rise in the 4% range for the time being."

Government Issues Repeated Warnings on Expanding Inflation

The government recently raised its level of alert regarding the economic situation, citing both domestic and external risks that are not only constraining domestic demand recovery but also intensifying domestic inflation.

On the 15th, the Ministry of Economy and Finance stated in the 'Recent Economic Trends (Green Book) April issue' that "Our economy continues to see improvements in exports and employment, but concerns remain over constraints on domestic demand recovery due to the spread of variant viruses and the prolonged Ukraine crisis, and inflationary pressures have expanded."

Since December last year, the Green Book has indicated the negative impact of COVID-19 on domestic demand for five consecutive months. Notably, the mention of inflation is the first since February 2011 to January 2012, when the domestic consumer price inflation rate hovered around 4%. This reflects the sense of crisis following last month's inflation figure surpassing the 4% range again for the first time in about a decade.

Externally, attention was drawn to the additional impact on the domestic economy from China's lockdown measures due to the spread of COVID-19. Lee Seung-han, head of economic analysis at the Ministry of Economy and Finance, explained, "Externally, amid supply chain disruptions and inflationary pressures caused by Russia's invasion of Ukraine, uncertainties in the global recovery trend have expanded due to lockdown measures in major Chinese cities and the possibility of accelerated monetary policy shifts in major countries."

The Return of the Ministry of Economy and Finance's Heyday

With a large number of officials from the Ministry of Economy and Finance appointed to key positions in the Blue House and core cabinet of the Yoon Seok-yeol administration, a 'Ministry of Economy and Finance heyday' has begun. Expectations for an economic dream team have risen as not only the first Prime Minister and Deputy Prime Minister for Economy but also the Presidential Chief of Staff have all been selected from the Ministry of Economy and Finance, stirring speculation that the already powerful ministry's influence will become even stronger in the next government. Some even compare this to a revival of the 'Super Ministry of Economy and Finance' era during the YS (Kim Young-sam) administration, when the Economic Planning Board and Ministry of Finance were merged into a giant ministry.

According to government sources on the 15th, President-elect Yoon Seok-yeol is highly likely to appoint Han Duck-soo as Prime Minister, Choo Kyung-ho as Deputy Prime Minister and Minister of Economy and Finance, and Kim Dae-gi as Presidential Chief of Staff, followed by Choi Sang-mok, former 1st Vice Minister of Economy and Finance and currently the secretary of the Economic 1st Division of the transition committee, as Chairman of the Financial Services Commission.

The commonality among them is that they are all career economic bureaucrats from the Ministry of Economy and Finance. Han Duck-soo and Kim Dae-gi are from the Economic Planning Board and the Budget Office, predecessors of the Ministry of Economy and Finance, and Choo Kyung-ho also started his public service career at the Ministry of Government Administration and Home Affairs and served as the 1st Vice Minister of Economy and Finance. If Choi Sang-mok is appointed as Chairman of the Financial Services Commission, the Prime Minister, Deputy Prime Minister, and Financial Services Commission Chairman will all be officials from the Ministry of Economy and Finance, alongside the Presidential Chief of Staff who assists the president closely.

Government Approves 'CPTPP Accession Plan'

The government decided on the 15th to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

According to the Ministry of Economy and Finance, the government held the '228th Ministerial Meeting on Foreign Economic Affairs' in writing, chaired by Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, and approved the 'CPTPP Accession Promotion Plan.' The written meeting included Deputy Prime Minister Hong (chair), ministers from the Ministry of Science and ICT, Ministry of Foreign Affairs, Ministry of Agriculture, Food and Rural Affairs, Ministry of Trade, Industry and Energy, Ministry of Environment, Ministry of Land, Infrastructure and Transport, Ministry of Oceans and Fisheries, Ministry of SMEs and Startups, the head of the Office for Government Policy Coordination, and the Blue House economic chief.

The government is expected to report this to the National Assembly as early as next week and then proceed with the formal accession application process targeting CPTPP member countries. It is anticipated that it will take at least one year or more to complete the accession.

Social Distancing Lifted After 2 Years and 1 Month

Social distancing measures implemented to curb the spread of COVID-19 will be lifted on the 18th. Since the introduction of distancing in March 2020, restrictions on private gatherings and operating hours of cafes and restaurants will be completely removed after 2 years and 1 month.

On the 15th, Prime Minister Kim Boo-kyum held a meeting of the Central Disaster and Safety Countermeasure Headquarters at the Government Complex Seoul and announced, "The current restrictions on operating hours of multi-use facilities until midnight and the limit of up to 10 people for private gatherings will be fully lifted starting Monday (the 18th)."

Restrictions on events and assemblies, currently allowed up to 299 people, and religious facility capacity limits capped at 70% will also be removed. From the 25th, bans on eating and drinking in multi-use facilities such as movie theaters, indoor sports facilities, and religious facilities will be lifted. However, the mask-wearing mandate will be maintained for the time being.

Prime Minister Kim said, "Wearing masks indoors will inevitably be maintained for a considerable period," and added, "Regarding outdoor mask-wearing, which is relatively less risky, we will evaluate the quarantine situation after two weeks and make a decision."

On the 14th, a day before the government’s announcement of the social distancing adjustment plan and the normalization of quarantine and medical systems, a karaoke room near Jonggak Station in Seoul has a notice posted stating that it will operate until 12 PM. Photo by Mun Ho-nam munonam@