[Inside Chodong] The End of the Low-Interest-Rate Era and the Arrival of the 'New Regime'

Central Banks Around the World Face Complex Calculations
A Year Marked by the "Fight Against Uncertainty"
High Inflation May Become Entrenched

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jeong] "It's small but expensive."

The representative winter snack, Bungeoppang, has gotten smaller. Mini Bungeoppang, only about one-third the size of a palm, used to be 3,000 won for 10 pieces just a month ago, but now the price tag has been changed to 8 pieces. The so-called "Ingeo-ppang," called mini Bungeoppang, is more expensive because it contains glutinous rice, unlike regular Bungeoppang which mainly uses wheat flour. The owner argues that it is not profitable to make them in the original Bungeoppang size. The sharp rise in Bungeoppang prices is due to the increase in raw material costs. According to Korea Price Information Service, red beans, which cost 3,000 won for 800g in 2017, doubled to 6,000 won last year. During the same period, wheat flour rose by 50%, and liquefied petroleum gas (LPG) prices increased by 27.4%.

It's not just food items. From this month, the basic fare for medium-sized taxis in Seoul jumped 26% from 3,800 won to 4,800 won. Following taxis, subway and city bus fares are also scheduled to increase consecutively starting in April. Camping enthusiasts are also feeling the impact of soaring energy prices this winter. To endure the cold while camping, heaters are necessary, but the price of kerosene used for this has skyrocketed. According to Korea National Oil Corporation's OPINET, as of February 7, the average price of indoor kerosene is 1,476.9 won per liter. On the same date, the price was 874.5 won per liter in 2021 and 1,143.7 won last year. For vulnerable groups without access to city gas, kerosene is practically the only heating source and is no longer an affordable fuel. After the cold wave hit in January causing heating bills to soar, many fear receiving their bills in February.

The consumer price index in January rose 5.2% compared to the same month last year due to the impact of public utility fee hikes, marking an increase in the rate of rise after three months. Although the government expects inflation to gradually slow down, high inflation above 5% is expected to continue in February, increasing concerns about household budgets.

Last year, central banks around the world declared war on inflation and raised benchmark interest rates repeatedly, but this year their calculations are expected to become even more complicated. Inflation is not easily subdued, and with the shadow of a global economic recession looming, central banks face deeper dilemmas in managing monetary policy. Due to the conflict between growth and inflation, economic experts have differing views on when the benchmark interest rate hikes will end and when rate cuts might begin.

In academia, there is heated debate about the arrival of a "New Regime." The era of price stability and long-term interest rate declines that lasted for 40 years due to the pandemic crisis is over, and a new era of structurally higher inflation and market volatility has arrived. In this regime, persistent high inflation limits the maneuvering room of central banks. If a recession and financial instability occur amid insufficient fiscal capacity after experiencing the pandemic and energy crisis, difficulties could intensify.

This year’s key theme is the "fight against uncertainty." The Bank of Korea must carefully consider all possible scenarios, enhance forecasting capabilities to respond to emergencies, and propose effective policy mixes. Economic agents, who have been accustomed to a low-interest-rate environment and may have "overpaced," must adjust their consumption patterns to prepare for a potentially sustained high-interest-rate environment. The government should also make efforts to support vulnerable groups with micro-level policies to help them find an exit during this process.