[Issue Interview] "Sticky Prices... BOK, No Signal for Easing"

Hwang Yoon-jae, President of the Korean Economic Association and Seoul National University Distinguished Professor
Focus More on Inflation than Economic Growth
Must Clearly Maintain Tightening Policy
Repeated Control of Public Utility Prices Leads to Sharp Increase in Social Costs

President of the Korean Economic Association, Professor Hwang Yoon-jae, Seoul National University. Photo by Younghan Heo younghan@

[Asia Economy Reporter Seo So-jeong] "Currently, the Korean economy appears to have entered a stagflation phase, where inflation and economic recession occur simultaneously. The sticky price situation is expected to continue for some time. The Bank of Korea must clearly maintain a tightening stance. Even if the Bank of Korea holds the base interest rate steady this month, it must not send a signal of easing."

Hwang Yoon-jae, Chair of the Korean Economic Association and Distinguished Professor at Seoul National University’s Department of Economics, strongly urged the Bank of Korea to maintain its tightening stance during an interview with Asia Economy on the 20th at his office at Seoul National University. With the government’s first official diagnosis that the Korean economy is entering a slowdown phase and high inflation continuing, there is growing concern about whether monetary policy should prioritize growth or inflation, but he pointed out that the focus should currently be on inflation.

Recently, U.S. inflation, employment, and consumption indicators have all pointed toward tightening, increasing the likelihood that the Federal Reserve (Fed) will keep interest rates higher for longer than expected. Although the market widely perceives that the Bank of Korea has reached its peak after raising the base rate by 0.25 percentage points to 3.5% last month, fears of U.S.-originated tightening have revived, causing government bond yields and exchange rates to rise. Professor Hwang warned, "Inflation has a ripple effect and tends to keep rising. If easing signals are given prematurely, it could lead to an uncontrollable situation later, resulting in a much greater cost."

-With high inflation, high interest rates, and a global economic slowdown overlapping, the Korean economy is in an emergency situation. What do you see as the biggest current risk?

▲Currently, the Korean economy seems to have entered a stagflation phase where inflation and recession occur simultaneously. The Consumer Price Index (CPI) in January rose 5.2% year-on-year, and core inflation also increased by 5.0%, indicating that inflation, which had paused, is rising again this year. Public utility fee hikes are fueling inflation, and psychologically triggering a chain reaction, increasing the likelihood that inflation will persist for a considerable period. Although the U.S. has mentioned disinflation, the pace of inflation slowdown is expected to be slow. This is truly a "sticky price" situation. February exports have turned red. Due to the global economic slowdown and semiconductor industry downturn, exports are sinking into a slump, with a high possibility of declining year-on-year for five consecutive months. Future trends will depend on external conditions such as major countries’ interest rate trends, the Russia-Ukraine war, China’s reopening, and domestic government policy directions, given Korea’s small open economy characteristics. Currently, people are suffering from high interest rates, and the possibility of financial system instability due to household debt and credit risk is also a major risk.

-The Monetary Policy Board meeting is approaching. The Bank of Korea faces a dilemma between growth and inflation. What is your view?

▲Balancing inflation and economic growth is key, but for now, more emphasis should be placed on inflation, and the tightening stance should be maintained. Recent inflation is strongly influenced by supply-side factors, so it is not easy to lower inflation by raising interest rates alone. It would be desirable for the Bank of Korea to raise the base rate by 0.25 percentage points at tomorrow’s Monetary Policy Board meeting, but even if it holds steady, it must clearly signal that tightening will continue. It should send the message that the freeze is temporary and that rate hikes can occur anytime depending on circumstances. The government naturally wants to revive the economy, but the Bank of Korea should recall the U.S. mistake in the 1970s (facing worst stagflation by trying to stimulate the economy despite spreading inflation). Now is the time to clearly maintain a tightening stance and not instill premature expectations of rate cuts in the market. Of course, selective support for vulnerable groups directly affected by high inflation is necessary.

-As heating cost shocks put the livelihood economy in difficulty, the government announced it would slow the pace of energy price hikes. It seems difficult to raise prices in the second half of the year ahead of next year’s general election.

▲Public utility price controls are necessary policies to lower expected inflation and protect vulnerable groups if inflation worsens rapidly. However, such price controls should be temporary as much as possible, and the more repetitive and prolonged the controls, the faster social costs can increase. An independent organization should be established to regularly review rising energy costs and systematically reflect them in public utility prices. Through this, public energy conservation can be encouraged, and incentives for technological innovation to reduce energy consumption should be provided. For vulnerable groups, sufficient fiscal support should be provided selectively, assuming a concrete funding plan for government spending is in place. The current support system is overly complex, causing eligible recipients to miss out, so the support system needs simplification.

President of the Korean Economic Association, Professor Hwang Yoon-jae of Seoul National University. Photo by Huh Young-han younghan@

-President Yoon Suk-yeol ordered a reduction in banks’ interest rate margins, citing the significant harm caused by banking industry oligopoly.

▲The banking industry is a representative regulated industry, so government supervision and regulation are necessary to ensure the financial system functions properly. Since the foreign exchange crisis, Korea’s banking industry concentration has significantly increased due to financial restructuring and mergers. Theoretically, high market concentration does not necessarily mean low competition within the industry, but in Korea, despite the large scale of banks, economies of scale and cost efficiency have not improved significantly, while empirical studies show that competition among banks in deposit and loan markets has weakened, increasing profit efficiency and market dominance. The level of competition in the banking industry affects the efficiency of capital allocation. In monopolistic situations, banks tend to earn excessive profits and may supply insufficient funds to the market or impose high costs on fund demanders. In this regard, the government’s policy direction to increase competition in the banking industry is supported as it improves capital allocation efficiency. However, monitoring is necessary to ensure that introducing excessive competition does not threaten financial system stability.

-With semiconductor demand decreasing and exports to China sharply falling, warning signs have lit up on the export front. What are the measures to overcome this crisis?

▲Semiconductor exports are highly sensitive to the pace of global economic recovery. China’s reopening is expected to have a positive impact on the export decline. In the trend of deglobalization and economic bloc formation, the Korean economy needs to diversify its trade and investment targets. Although Korea’s recognition has greatly increased due to the Korean Wave (Hallyu), there are still many markets we have yet to explore, such as Latin America, Africa, and Eastern Europe. Especially, efforts are needed to diversify supply chains and possess irreplaceable technological capabilities. Looking at cases like the U.S. Ford and Chinese battery company CATL cooperating technologically under the U.S. Inflation Reduction Act (IRA), technology is ultimately key. Although U.S.-China conflicts continue, cooperation occurs as needed. To become a technologically advanced country, companies must be able to start freely, and even if they fail, the government should provide a safety net to create a dynamic industrial ecosystem. Israel, known as a startup paradise, attracts global capital. Since Korea’s information and communication technology (ICT) sector is well developed, active nurturing of startup companies is necessary.

-The Yoon Suk-yeol administration has pledged labor, pension, and education reforms to restore Korea’s potential growth rate. What are the urgent tasks?

▲Labor market flexibility is needed. Securing flexibility in working hours is relatively easy to approach. Since COVID-19, the MZ generation prefers telecommuting and wants to use working hours freely depending on circumstances. Partial introduction of wage flexibility, paying higher wages to more capable people, is also possible. Pension reform should be pursued together with parametric reforms within the broader framework of structural reform. Social consensus on raising contribution rates is important. For education reform, regulations on universities should be relaxed. Korea has strict regulations on university quotas in the metropolitan area, but adjusting quotas according to academic development is necessary. Japan allowed an increase in university quotas in Tokyo to foster talent in the digital field.

-As the newly appointed Chair of the Korean Economic Association, what are your goals for this year?

▲I will do my best to activate academic exchanges by hosting high-quality domestic and international academic conferences. I plan to actively hold policy symposiums on economic issues with other associations and institutions. The World Congress of Economists, known as the "Olympics of Economics," will be held in Seoul in 2025, and the association worked hard to secure the hosting rights. I want to prepare for a successful event and contribute to raising the global status of Korean economics.