[High Inflation War] ① Han Eun Research Director: "The End of High Inflation is in Sight... Perceived Inflation Will Also Stabilize"

August Inflation Rate Reaches 2% Bank of Korea Target
End Stage of High Inflation Era, Public Perceived Prices Expected to Decrease
Interview with Lee Jiho, Director of Bank of Korea Research Department

Lee Ji-ho, Director of the Research Department at the Bank of Korea, is being interviewed by Asia Economy at the Bank of Korea in Jung-gu, Seoul. Photo by Jo Yong-jun jun21@

"The peak of inflation has passed. We expect the inflation that people feel in their daily lives to gradually stabilize as well."

The Bank of Korea, which has been fighting a war against high inflation for the past few years, is now considering declaring an end to it. Last month, consumer prices rose by only 2.0% compared to the previous year, reaching the Bank of Korea's inflation stabilization target. Inflation, which once surged to 6.3% in 2022, has dropped to 2.0%, leading the Bank of Korea to believe that the war against high inflation has almost passed the 80-90% mark.

The Bank of Korea expects inflation to stabilize in the low 2% range by the end of the year. If this happens, the inflation burden felt by the public is also expected to improve compared to now.

Lee Ji-ho, Director of the Bank of Korea's Research Department, who has been on the front lines of the high inflation battle, said in an interview with Asia Economy on the 5th that the inflation war following the COVID-19 pandemic is now nearing its end, and the inflation felt by the public, which makes life difficult, will improve over time. The Research Department is a key division responsible for economic forecasts and analysis at the Bank of Korea, which prioritizes price stability.

Director Lee Ji-ho: "Proactive interest rate hikes and government inflation stabilization measures are effective"

Korea's inflation stabilization speed is faster compared to advanced countries like the United States and Europe. The U.S. consumer price inflation rate in July was still 2.9%, and the Eurozone's was 2.2% in August, both higher than Korea's. Director Lee explained, "The recent decline in international oil prices and agricultural product price increases greatly helped stabilize prices in August," adding, "Last summer, agricultural product prices were very high, so there was also a base effect."

He emphasized that the Bank of Korea's proactive interest rate hikes and the government's efforts to stabilize prices were also of great help. He stated, "Our proactive monetary policy, including raising the benchmark interest rate more than six months ahead of advanced countries, helped stabilize prices," and added, "Monetary policy influences people's psychology, so proactive responses are important, and in that regard, monetary policy was effective."

He also added, "The government's efforts to stabilize prices through measures such as gradually reducing the fuel tax cut, stabilizing agricultural product prices, and suppressing public utility fee increases have been effective."

Lee Ji-ho, Director of the Research Department at the Bank of Korea, is being interviewed by Asia Economy at the Bank of Korea in Jung-gu, Seoul. Photo by Jo Yong-jun jun21@

However, Director Lee noted, "Although the inflation rate has decreased, the overall price level remains high, so there are many aspects where people still feel the burden," and forecasted, "Inflation around 2% needs to persist for a considerable period for people to feel less burdened by prices than now." He explained that as the expected inflation rate, which was somewhat high at 2.9% in August, gradually decreases, the public's inflation burden will lessen.

Fortunately, he predicted that the consumer price inflation rate around 2% will continue for some time. He explained, "Considering various conditions such as the recently lowered international oil prices and domestic and international economic situations, prices are expected to fluctuate around the current level or slightly higher," adding, "There will be no sudden sharp rise or a rapid drop to pre-pandemic levels for the time being."

As prices stabilize, market attention shifts to benchmark interest rates... "Household debt increase must be resolved"

As prices stabilize somewhat, market attention is now focused on cuts to the benchmark interest rate. The market expects the Bank of Korea to lower the benchmark interest rate once in October or November.

Bank of Korea Governor Lee Chang-yong also told reporters on the 3rd, "The inflation trend is going as we expected," and said, "From the perspective of price stabilization, it is now a time when lowering the benchmark interest rate can be fully considered." However, Governor Lee and the Bank of Korea are concerned about household debt. Recently, household debt has increased due to rising housing prices in the metropolitan area, raising concerns about negative impacts on financial stability.

Director Lee explained, "The rapid increase in household debt is similar to a balloon inflating and becoming thinner," adding, "If household debt expands significantly compared to household income, the balloon becomes thin and can easily burst with a small shock, making our economy vulnerable to external shocks." He diagnosed, "Our country's household debt ratio is currently very high globally," and "the balloon has become very large." However, he said, "Since the government has a strong will to address the rapid increase in household debt, we expect the problem to improve."

Regarding concerns that the benchmark interest rate should have been lowered last month and that the timing might have been somewhat late, he asked for understanding of the difficulties in monetary policy decisions. Director Lee explained, "In a situation where concerns about household debt are very high, the Monetary Policy Committee made the decision after carefully considering financial stability."

Ahead of Chuseok, gift sets of pears are being sold on the 5th at Hanaro Mart Yangjae Branch in Seocho-gu, Seoul. Photo by Jinhyung Kang aymsdream@

He cited geopolitical risks as the biggest variable for the Korean economy in the second half of the year. Director Lee analyzed, "Major events such as the war between Russia and Ukraine or conflicts in the Middle East negatively affect our economy," and "The economic slowdown of the G2 (two major powers), the United States and China, faster than expected is also a negative factor for our economy." He forecasted that if these risks do not materialize, the Bank of Korea's predicted economic growth rate of 2.4% for Korea this year will be fully achievable. He stated, "Our exports in August were good, and domestic demand is expected to gradually improve, so the 2.4% forecast remains valid."

Regarding the quarterly economic forecasts that the Bank of Korea started for the first time this year, he emphasized that a task force (TF) team was even formed within the Research Department to improve accuracy. Until now, the Bank of Korea only disclosed economic and inflation forecasts semiannually, such as for the first half and the second half of the year, but starting last month, it began releasing detailed quarterly forecasts for the 1st, 2nd, 3rd, and 4th quarters. This is a measure to enhance transparency in monetary policy and improve communication with the market.

Given Korea's characteristics as a small open economy highly influenced by external variables, forecasting is considered more difficult compared to advanced countries. Director Lee said, "Quarterly economic forecasting is such a difficult task that we say we have to walk a tightrope ourselves," adding, "We are expanding the data we can monitor and have even formed a dedicated team to improve accuracy."