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(EDITORIAL from Korea Times on May 6)

All News 07:03 May 06, 2022

Looming perfect storm
Steps needed to tackle inflation, weak won and high key rate

The nation is faced with multiple risk factors arising from growing inflationary pressure, rate hikes and the depreciation of the Korean won against the U.S. dollar. Consumer prices soared 4.8 percent in April from a year earlier, marking the highest growth since October 2008 amid a global financial crisis. As the government expects the inflationary pressure will increase for a while, the central Bank of Korea is also poised to raise the key rate to tackle possible price growth.

The current surging inflation is a global phenomenon, not confined to Korea, as it was largely caused by the rupture in global supply chains amid Russian's ongoing invasion of Ukraine. Such a global supply-demand imbalance is unlikely to be resolved in the near future given the protracted war. The war prompted hikes in the prices of energy resources such as crude oil and natural gas, minerals like nickel, cobalt and lithium needed to produce electric cars and batteries and agricultural products such as wheat and barley. Experts foresee it will take at least two to three years until the situation turns for the better.

As the U.S. Federal Reserve is tightening its monetary policy to cope with soaring consumer prices, the BOK has been pressured to raise the key rate. Concern has been increasing of more foreign capital exiting the Korean market, nudged by the possible reversal of the interest rates between Korea and the U.S. should the Fed raise the rate by 50 basis points again.

A total of 13.76 trillion won ($10.86 billion) of foreign investment exited the Korean stock market in the first four months of this year. Yet the financial authorities should take a cautious approach in determining when to raise the interest rate as any hasty increase will greatly increase the burden on households and enterprises. This will also dampen the economy and lead to a nightmarish stagflation of economic slowdown amid growing inflation.

The Moon Jae-in administration convened a meeting of economy-related ministers Tuesday to discuss the issue, yet failed to find a feasible solution. Most importantly, the incoming government of Yoon Suk-yeol should leave no stone unturned to secure the channels for stable supply of energy resources and food grains. In the same context, the financial authorities should take more detailed steps to tackle a further depreciation of the won against the dollar.

But it should refrain from hasty interventions in the forex market. The incoming administration should proactively consider the possible foreign exchange swap with the U.S. to cope with the possible exodus of foreign capital. BOK Governor Lee Chang-yong said, "We worry about downside economic growth. Yet what is more worrisome is the growing inflationary pressure." Growing consumer prices will inevitably trigger demand for wage hikes. It is time to make combined efforts to survive the looming multiple crisis factors.

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