[Inflation Target Check] Lee Ju-yeol "Low inflation to persist for a while... Maintain monetary easing stance"

Bank of Korea's 'Price Stability Target Operation Status Report'

Consumer Price Inflation Rate to Remain Around 0% for the Time Being
"Preparing Measures to Normalize Accommodative Monetary Policy After Crisis Subsides"

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] Due to the impact of the novel coronavirus infection (COVID-19), the consumer price inflation rate is expected to remain at a low level for the time being, and the Bank of Korea announced that it plans to maintain a loose monetary policy stance for the time being. Although the consumer price inflation rate is expected to gradually rise after next year, the pace of inflation increase is expected to be moderate as the economic recovery is not strong and the government's welfare policy stance is expected to continue.

On the 25th, Bank of Korea Governor Lee Ju-yeol said at a press conference on the 'Price Stability Target Operation Status Review Report,' "As the domestic economy's growth is expected to be sluggish due to the spread of COVID-19, demand-side inflationary pressures are also expected to remain low, so we will maintain a loose monetary policy stance." He added, "We plan to operate monetary policy carefully to support the recovery of growth going forward, stabilize the inflation rate at the target level in the medium term, and pay attention to financial stability."

Governor Lee also added that they will prepare in advance for the gradual normalization of expansionary measures once the crisis subsides. This is to maintain vigilance against the possibility of accumulating financial imbalances and to reduce shocks that may occur when reversing the loose monetary policy.

Since COVID-19, the consumer price inflation rate (year-on-year) has significantly slowed. The consumer price inflation rate, which rose to the mid-1% range in January, fell to 0.1% in April and -0.3% in May. The core inflation rate also dropped to the low to mid-0% range. The consumer price inflation rate is far below the Bank of Korea's price stability target of 2.0%.

The Bank of Korea sees the sharp drop in international oil prices as a major factor in the slowdown of consumer price inflation after COVID-19. It also cited weakened demand-side inflationary pressures due to social distancing and increased downward pressure on prices from government policies as reasons. According to the Bank of Korea's own analysis, among the 1.8 percentage point decline in the consumer price inflation rate in May compared to January, the drop in oil prices and government policies accounted for -1.6 percentage points, and the slowdown in face-to-face service prices accounted for -0.2 percentage points.

Using regression models by item, the Bank of Korea estimated that the recent decline in international oil prices lowered the May consumer price inflation rate by about 0.9 to 1.0 percentage points compared to January. While the direct effect through petroleum prices was a major factor in the sharp decline, the indirect effects between goods and services were limited, but if oil prices remain low, the effect is likely to gradually increase.

The future direction of prices is highly uncertain. Since it is difficult to predict the course of COVID-19, people are expected to increase savings rather than consumption, debt burdens have increased, and with the activation of non-face-to-face transactions (acceleration of the digital economy), the Bank of Korea forecasts that the low inflation trend will continue. Governor Lee explained, "Based on historical experience, the so-called 'super-savers' with extreme risk-averse tendencies may increase after experiencing a crisis. While the financial soundness of economic agents may improve, the overall economy may see a slow recovery in consumption and investment, which are pillars of growth, and this can act as a factor lowering prices again."

However, he added, "It is necessary to pay attention to the continued accumulation of global liquidity and inflationary pressures due to the weakening of the global value chain (GVC)."

This content was produced with the assistance of AI translation services.