[Q&A] Lee Ju-yeol "Inflation Boomerang After COVID? Not Very Likely"

Bank of Korea 'Price Stability Target Operation Status Briefing'

"Rapid Jeonse Price Increase Not Mainly Due to Low Interest Rate Policy"
"If COVID-19 Spread Does Not Subside, It Will Lower Next Year's Growth Rate"

Lee Ju-yeol, Governor of the Bank of Korea, is speaking at the Price Stability Target Operation Status Review Briefing and Year-end Press Conference held at the Bank of Korea in Jung-gu, Seoul, on the afternoon of the 17th.

[Asia Economy Reporter Kim Eun-byeol] Although there are warnings that inflation will occur once the COVID-19 pandemic ends, Lee Ju-yeol, Governor of the Bank of Korea, stated that "the possibility of it acting as a rapid inflationary pressure is not high."

At a briefing and year-end press conference held on the 17th at the Bank of Korea in Jung-gu, Seoul, Governor Lee said, "There are claims that inflation will be inevitable after the end of COVID-19 due to an unprecedentedly accommodative stance," adding, "Personally, although liquidity has increased significantly, I cautiously think it will not exert inflationary pressure to the extent of raising concerns about expanded inflation."

Regarding the criticism that the recent sharp rise in jeonse (long-term lease) prices is due to the low interest rate environment, he said, "It has an impact, but it cannot be considered the main factor." Governor Lee emphasized, "I believe the recent rise in jeonse prices is more attributable to growing concerns about supply-demand imbalances in the jeonse market. The increase in jeonse prices has expanded since June, but the low interest rate environment has been maintained for a considerable period before that."

The following is a Q&A with Governor Lee.

- There are concerns that inflation may occur as the economy normalizes with the distribution of COVID-19 vaccines.

▲ The question of whether inflation will come is a concern not only for us but also for central banks and academia worldwide. The accommodative stance has continued to an unprecedented degree, even implementing negative interest rates, and there are many claims that inflation will be inevitable when COVID-19 ends because accommodative measures cannot be withdrawn all at once. On the other hand, there is also an opposing view that inflation will not immediately occur. Personally, although liquidity has increased significantly, I think the possibility of it acting as rapid inflationary pressure is not high. It is true that it is difficult to rule out, but I see it as not inflationary pressure to the extent of raising concerns about expanded inflation.

- Social distancing measures have been raised to level 2.5, and level 3 is imminent. What about the economic impact?

▲ Looking at the recent COVID-19 developments, the situation appears more severe than the Bank of Korea expected when it announced the economic outlook last month. Social distancing has been strengthened more than expected, and consumption, especially face-to-face services, is expected to show a weaker trend than anticipated. Compared to the two previous COVID-19 waves, the negative impact on consumption could be greater. This will hit sectors such as retail and food and accommodation, which have a very high employment ratio. If the spread of COVID-19 does not subside this winter, it will undoubtedly act as a factor lowering next year's growth rate. However, exports, centered on semiconductors, are expected to continue recovering, so there is hope that exports may perform better than expected. We need to observe how the COVID-19 spread progresses this winter.

- The government points to low interest rates as the cause of rising jeonse prices.

▲ Jeonse prices, like housing prices, are influenced by interest rates. However, they are affected by various factors such as supply-demand conditions and government policies. Of course, looking only at interest rates, low rates reduce financial costs and can increase jeonse demand, especially in preferred residential areas, thus acting as a factor in rising jeonse prices. However, the increase in jeonse prices has expanded since June, while the low interest rate environment has been maintained for a considerable period before that. Considering this, although low interest rates affect jeonse prices, I don't think they can be considered the main factor. I believe the recent rise in jeonse prices is more attributable to growing concerns about supply-demand imbalances in the jeonse market.

- The low inflation rate in the 0% range continues.

▲ The main reasons consumer prices rose by 0.5% from January to November this year are demand-side downward pressure due to COVID-19, a sharp drop in international oil prices, and strengthened government welfare policies. Next year, these three factors may move in the opposite direction. Deflation requires a general decline in prices of goods and services, so next year is unlikely to be a deflationary situation. Excluding unexpected shocks, I expect inflation to be around 1% next year and then rise to the mid-1% range thereafter.

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