Bank of Korea: "If Inflation Rise Is Not Controlled, Greater Damage to Overall Economy"

[Image source=Yonhap News]

The Bank of Korea explained that since May, inflation faces upside risks while growth faces downside risks, stating, "If the rising inflation is not controlled, high inflation may become entrenched, causing greater damage to the overall economy."

On the 18th, Kim Woong, Director of the Bank of Korea's Research Department, wrote in a post titled "Inflation Faces Upside Risks, Growth Faces Increasing Downside Risks" on the Bank of Korea blog, "Recently, concerns about a global economic slowdown have increased due to accelerated interest rate hikes in major countries and the prolonged Ukraine crisis, suggesting that downside risks to the domestic economy have grown in the second half of the year."

Regarding the consumer price inflation rate, which was in the 3% range at the beginning of the year but entered the 6% range last month, Director Kim pointed out, "Core inflation and general public inflation expectations have also rapidly risen to around 4%. The high inflation trend is expected to continue for the time being, and the annual inflation rate this year is anticipated to significantly exceed the May forecast level of 4.5%."

He forecasted that three factors will greatly influence the future trajectory of the domestic economy: ▲ global economic slowdown, ▲ energy price trends, and ▲ the interaction between domestic inflation and wages.

Director Kim explained, "Due to the economic slowdown in major trading partners, domestic exports are expected to weaken in the second half of the year. However, the expansion of IT demand related to digital transformation is likely to partially cushion the export slowdown."

Regarding the increased volatility in energy prices such as crude oil and natural gas, he said, "If the decline in crude oil prices continues, it will help reduce inflationary pressures. However, the sustained high prices of natural gas and coal, which have a consumption share comparable to crude oil, will continue to exert upward pressure on inflation."

He added, "In the current situation where inflation has risen sharply, if inflation expectations become unstable, the interaction between inflation and wages will strengthen, potentially entrenching high inflation. Therefore, it is important to actively respond with policies to suppress the spread of inflation expectations."