A former Korean central banker known as “the dove” who called for interest-rate cuts into uncharted territory during the Covid-19 pandemic has changed his tune amid stubbornly sticky inflation.
(Bloomberg) — A former Korean central banker known as “the dove” who called for interest-rate cuts into uncharted territory during the Covid-19 pandemic has changed his tune amid stubbornly sticky inflation.
“The Bank of Korea should concentrate on their first mandate: Price stability,” Cho Dong-Chul, a former BOK board member from 2016-2020, said in an interview Thursday. He added that right now “moderately tight monetary policy would be appropriate.”
The pivot by Cho — now president of the Korea Development Institute, a government economic research agency — underscores how pervasive inflation pressures remain in South Korea, despite a cooling economy and sluggish demand for the country’s exports.
Cho spoke following the release of the institute’s semi-annual economic outlook that included a downward revision to the growth forecast and still-elevated inflation. Gross domestic product is likely to rise 1.5% in 2023, down from a 1.8% forecast in February, while consumer prices are seen advancing 3.4% on an annual basis. That’s only slightly below the 3.7% increase in April, based on government data.
The state-backed institute said that the policy rate “needs to be maintained at the current level for a while.”
Cho’s comments are in-line with the BOK’s recent messaging. Governor Rhee Chang-yong has also flagged that price growth is still above the central bank’s target and that it’s too soon to entertain a policy pivot toward stimulating an economy hampered by weak global demand.
While consumer prices have eased for three straight months, the country’s unemployment rate is near the lowest level in data going back to 1999, which should help fuel spending throughout the year.
“Justification for economic stimulus largely comes from the employment situation of the country,” Cho said. “But now, the South Korean labor market isn’t at risk and, frankly, is doing better than I expected.”
At the BOK, Cho was known for continuously calling for policy easing. Just before the end of his tenure in April 2020— as the central bank had already cut its key rate to the lowest since establishing a new base rate system in 2008— Cho called for it to be pushed down even further.
“The reason why I argued for monetary easing during that time was because the country’s CPI was really low back then,” he said. “Now, I would be a hawk.”
While price stability was still a top priority for him at the time, consumer prices were consistently below the central bank’s 2% target, prior to the inflation surge brought on by the global economic reopening.
Since then, inflation has been stickier than policymakers expected. The BOK raised its headline rate by 300 basis points from mid-2021 through January, its most aggressive tightening cycle since the central bank established the 7-day repo rate as its base rate in 2008.
The central bank is expected to hold rates at 3.5% for a third straight meeting later this month, as policymakers wait for inflation to show a sustained deceleration. Analysts broadly see them holding rates until at least June, according to a Bloomberg survey of economists, in a continuation of their wait-and-see approach.
Monetary policymakers have flagged ongoing risks to the economic outlook, including weak technology demand from China that’s dented exports, Korea’s largest source of growth. Construction financing remains a risk area and the residential real estate sector has been plagued by a growing fraud issue.
South Korea narrowly avoided a recession in the first quarter, with GDP rising a meager 0.3% from the prior three months, led by weaker investment.
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