BOK: "Interest Rate Hike Resumption Differs Between Canada, Australia Inflation and Korea"

"Impact of High Housing Price Increase and Tight Labor Market"

Bank of Korea Governor Lee Chang-yong is holding a press conference after concluding the regular meeting of the Monetary Policy Committee at the newly completed Bank of Korea headquarters in Jung-gu, Seoul, which was finished after six years, on the 25th morning. Photo by Joint Press Corps

As prices in Canada and Australia rise again, leading to interest rate hikes this month, an analysis shows that these countries have higher housing price growth and tighter labor markets compared to South Korea.

On the 19th, the Bank of Korea stated in its report titled "Recent Inflation Conditions and Circumstances in Countries Raising Policy Rates" that "Canada and Australia, which recently raised their policy rates again, are showing signs of expanding inflation momentum." In these countries, the core inflation rate (year-on-year) is slowing down more slowly than the headline consumer price inflation, while the inflation momentum measured by the three-month change rate is expanding again. In Canada, the inflation momentum of both consumer prices and core prices has increased, while in Australia, the inflation momentum of consumer prices has expanded.

In particular, the expansion of inflation momentum in Canada and Australia was evident mainly in service prices. In Canada, the inflation momentum of service prices, which had contracted since mid-last year, has expanded for two consecutive months recently. Australia's service price inflation momentum has clearly expanded since the second half of last year, recently reaching a high level exceeding 7%.

The report analyzed that the expansion of service price inflation momentum in Canada and Australia is due to high inflationary pressures from the housing market, private consumption, and labor market aspects. Housing prices in Canada and Australia have risen significantly compared to the pre-pandemic period and remain at high levels, leading to continued increases in rent within the Consumer Price Index (CPI).

While South Korea's housing prices were considerably adjusted last year, in Canada and Australia, the increase in net immigration during the pandemic recovery process significantly contributed to the expansion of housing demand. Additionally, the rapid recovery of private consumption in these countries indicated strong demand-side inflationary pressures. The substantial accumulation of excess household savings since the pandemic supported the swift recovery of private consumption, and the rapid recovery of foreign tourist numbers since last year is also believed to have helped improve domestic demand conditions.

The labor markets in Canada and Australia also remained very tight, with the ratio of job vacancies to unemployed persons significantly higher than before the pandemic. In Australia, the ratio of job vacancies to unemployed persons rose relatively sharply, and the unemployment rate dropped significantly by 1.6 percentage points compared to the pre-pandemic period, indicating a very tight labor market. However, recently, both countries have seen an increase in immigration due to the easing of quarantine measures, and the impact of interest rate hikes has begun to appear, leading to a decrease in labor demand.

The Bank of Korea stated, "Compared to Canada and Australia, South Korea's housing prices have slowed considerably, and the tightness of the labor market is lower. However, since consumption and employment trends are relatively favorable and the cumulative cost-push inflation effects continue, attention should be paid to the possibility that core inflation may show a more rigid trend than expected."