3613 trillion won in market currency, the highest ever… Can the base rate rise to 2.00%?

In December of last year, the market currency amount exceeded 3600 trillion won. In just one month, it increased by nearly 24 trillion won, again breaking the all-time high. As increased liquidity can act as upward pressure on inflation, the Bank of Korea is highly likely to raise the base rate. The market is also predicting that the base rate could rise to 2.00% this year.

According to the ‘Monetary and Liquidity Trends’ data released by the Bank of Korea on the 17th, the market money supply in December last year recorded 3613 trillion won based on the broad money supply (M2). This is an increase of 23.8 trillion won (0.7%) from the previous November, when it recorded an all-time high. The money supply in the market is breaking a record high every month after exceeding 3,000 trillion won in April 2020. Compared to the same month of the previous year, it increased by 13.2%, the highest rate of increase since November 2008 (14.0%) in 13 years and 1 month.

M2 includes cash, demand deposits, and withdrawal-type deposits (more than M1) as well as MMF (money market funds), regular deposits and savings accounts of less than 2 years, beneficiary certificates, CD (certificate of deposit), RP (repurchase bond), 2 years Short-term financial products that can be converted into cash immediately, such as financial bonds of less than two years and money trusts of less than two years, are included.

By economic entity, the amount of M2 owned by households increased by 14.4 trillion won in one month. The Bank of Korea explained that it was the effect that households sold alternative assets such as stocks and the effect of the disaster relief payment continued, although household loans turned to a decline. Businesses increased by 14.6 trillion won due to the inflow of corporate settlement funds following the government’s fiscal fund execution and sound export growth at the end of the year. Other financial institutions increased by 900 billion won.

By product, regular deposits and savings for less than two years increased by 20.5 trillion won. It is interpreted as a result of the increase in the deposit interest rate and the fact that funds were raised to manage the loan-to-deposit ratio. Money trusts also increased by 5.3 trillion won. On the other hand, frequent entry and exit (-5.7 trillion won) and MMF (-4.1 trillion won) decreased. As a result, M1, which includes frequent deposits and withdrawals, decreased by 0.6% from the previous month. This is the first decline in three years since December 2018 (-0.4%).

Jeong Jin-woo, Deputy Director of the Financial Statistics Team at the BOK’s Economic and Statistics Bureau said, “Household loans, which have surged since the spread of Corona 19, flowed to risky assets, and the M1 growth rate was high by preparing investment funds in frequent deposits and withdrawals. In the beginning, households started putting money into regular savings and savings accounts as Korea’s lending regulations became stricter,” he explained. He added, “Now, the M2 growth rate is not increasing because the central bank supplies new liquidity, but rather as a risk asset, liquidity that was not captured in the money supply is also increased as some liquidity is again captured in the currency category,” he added.

The problem is that increased market liquidity can encourage inflation. The consumer price inflation rate has been in the 3% range for four consecutive months from October last year to January this year, far exceeding the BOK target of 2.0%. The Bank of Korea, which manages inflation through monetary policy, has no choice but to refer to the money supply index, which is the upward pressure on inflation, in determining the base rate.

The BOK raised the key interest rate by 0.25 percentage points three times since August last year. The current base rate is 1.25%, the level just before COVID-19. The Monetary Policy Direction Meeting of the Monetary Policy Committee to decide the next base rate is on the 24th. As the base rate was raised once last month, it is unlikely that the base rate will be raised again after a month, even to examine the effects and trends.

Earlier this month, global investment banks JP Morgan and Goldman Sachs predicted that the BOK would raise the key interest rate twice this year.

However, the market is also gaining strength in the opinion that the BOK may raise the base rate three more times within the year depending on the recent liquidity and inflation trend. If the base rate is raised three times by 0.25 percentage points, it will be 2%. Lee Mi-sun, a researcher at Hana Financial Investment, raised the forecast for this year’s consumer price inflation from 2.0% to 2.8% and said, “The Bank of Korea will raise its base rate forecast from 1.75% to 2.00% at the end of this year.”

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