The Monetary Policy Committee of the Bank of Korea raised the base interest rate by 0.25 percentage points (p) again on the 14th. The annual interest rate is 1.25%, which is the level before the COVID-19 crisis. Lee Ju-yeol, governor of the BOK, hinted at an additional hike within the year, saying, “Even the base rate of 1.50% cannot be viewed as tightening.” Inflation is so severe that it is a strong will to recover the money loosed in the market and control the price level.
However, on the same day, the Ministry of Strategy and Finance presented a 14 trillion won supplementary budget plan. It is said to be a ‘one-point’ supplementary budget before the Lunar New Year holiday to support the self-employed who are severely affected by the corona virus. Even considering the desperate situation of the self-employed, it is difficult to comprehend that the supplementary budget is pushed for January, just a few days after the start of the new year. It is also intended to release the money ahead of the March presidential election. It is a supplementary budget that utilizes last year’s excess tax revenue, and most of the financial resources must be financed through the issuance of deficit government bonds with money that cannot be used before the settlement of revenue and expenditure in April. The National Finance Act stipulates that the world surplus should be paid off first by government bonds. It is a supplementary budget that ignores that and continues to increase the national debt.
The BOK and the Ministry of Strategy and Finance are going in opposite directions. They say they will tighten the currency and loosen the finances. Hong Nam-ki, Deputy Prime Minister of Economy, argues that it is a complementary ‘policy mix’ of fiscal and monetary policies, but it does not make sense. It’s a ‘mismatch’ that deviated from the goal. While the monetary authorities are raising the base rate to catch inflation, the fiscal authorities are playing separately by increasing market liquidity by organizing an unprecedented January supplementary budget.
In our current economic environment full of uncertainty, it is difficult to determine which will accelerate the economic recovery: monetary tightening through the BOK’s preemptive rate hike or the government’s repeated fiscal expansion. However, it is difficult to expect any effect from monetary and fiscal policies in the opposite direction, and only side effects are concerned.
When more money is released, inflationary pressure increases and the effect of an interest rate hike is nullified. The higher market interest rates make it impossible to keep up with inflation, and the interest burden on huge household debt increases. It goes without saying that those who borrowed from the soaring real estate prices are taking a hit. What is more serious is that the financially vulnerable groups such as the common people and small business owners who have inevitably increased their debts due to the corona crisis, and small and medium-sized enterprises (SMEs) will inevitably suffer more damage.
Recently, Koh Seung-beom, chairman of the Financial Services Commission, once again warned that “a gray rhino from afar is approaching,” and “we must prepare for danger.” The gray rhino, which refers to a potential risk factor that is expected but easily overlooked, was mentioned by Deputy Prime Minister Hong Nam-ki in October last year. The household debt crisis, the US interest rate hike, accelerated inflation and disruption of the global supply chain, the escalating trade dispute between the US and China, and the worsening of the Corona situation are overlapping. It is most urgent to minimize uncertainty through stable and consistent macroeconomic management, but the directions of fiscal and monetary policies are different.
