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(EDITORIAL from Korea Times on June 15)

All News 06:58 June 15, 2022

Take preemptive action
Minimizing price shock fallout critical

Local financial markets have tumbled over growing concerns about a global economic recession amid soaring inflation. The Korea Composite Stock Price Index (KOSPI) hit a 19-month low of 2,492.97 Tuesday, on its downward march for the sixth consecutive day. It plunged by 3.52 percent Monday, affected by a sharp fall in U.S. share prices Friday. The local currency also continued to lose its value against the U.S. dollar at an alarming pace.

The market turmoil was caused by reports that the U.S. Federal Reserve may take a "giant step" of raising its key interest rate by 0.75 percentage points this week, higher than an anticipated hike of 0.5 percentage points, to tame runaway inflation. The prospect of such a step is gaining traction after the U.S. announced Friday that the consumer price index surged 8.6 percent last month, the highest in 41 years.

If the Fed applies more aggressive fiscal tightening, global financial markets are likely to crash further. This could heighten market volatility and economic uncertainty. It could also signal the bursting of the asset bubbles which have been formed by monetary and fiscal easing to cushion the COVID-19 shock. There are growing fears about stagflation, a mixture of economic stagnation and high inflation.

South Korea, an export-driven economy, is more vulnerable to external factors such as a global financial turmoil and an economic slump than any other country in the world. Foreign investors are on a five-month "sell Korea" spree as downside risks have weighed on the Korean economy. The rapid depreciation of the local currency is also putting more pressure on foreign investors to dump Korean stocks to avoid foreign exchange losses. It could accelerate capital outflow from the country.

Now, the Yoon Suk-yeol administration should take preemptive action to ensure financial stability and keep the economic growth momentum. For this, the government must mobilize all possible means to bring inflation under control and minimize the effects of other downside risks on the economy. Of course, this is easier said than done. Yet the country cannot tackle all the difficulties by taking stopgap measures. Therefore it is imperative to work out more fundamental and comprehensive steps to avoid looming economic woes.

It seems inevitable for the Bank of Korea (BOK) to hike its key policy rate further following the Fed's move toward more aggressive monetary tightening. Some critics may argue that higher interest rates could prompt a recession and make the lives of low-income earners even harder due to the rising interest payment burden. But the country and its people will have to bite the bullet amid a bleaker economic outlook.

Consumer prices here surged 5.4 percent year-on-year in May, the highest level since August 2008. The BOK raised its key rate by 25 basis points to 1.75 percent last month, the fifth rate hike since last August. But rate increases alone are not sufficient to address all the deteriorating economic conditions. The country suffered a current account deficit in April for the first time in two years. The country's trade deficit surpassed $10 billion in the first five months of the year.

President Yoon and his policymakers should have a real sense of crisis. And they must concentrate on ensuring price stability and maintaining sustainable growth, however difficult it may be. Lawmakers of the ruling and opposition parties, for their part, should stop their partisan confrontation and move toward bipartisanship to prevent a financial and economic crisis and improve the livelihood of the people.
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