Prices Rising... IMF Says "Korea Not the Time to Raise Base Interest Rate" (Comprehensive)

Jonathan Ostery, Deputy Director of IMF Asia-Pacific Department
Online Press Briefing on Asia-Pacific Economic Issues

On the 13th (local time), Jonathan Ostry, Deputy Director of the Asia and Pacific Department at the International Monetary Fund (IMF), is conducting a Q&A session during an online press conference.

[Asia Economy Reporter Eunbyeol Kim] The International Monetary Fund (IMF) stated on the 13th (local time) that the South Korean economy is recovering faster than expected, but it is not yet the time to respond by raising the base interest rate. On the same day, Jonathan Ostry, Deputy Director of the IMF Asia and Pacific Department, answered an online press conference question from Asia Economy Newspaper asking, "Should the Bank of Korea consider raising the base interest rate?" by recommending, "It is advisable to maintain the current monetary policy and not raise the base interest rate." The IMF recently significantly raised South Korea's growth forecast for this year from 3.1% to 3.6%.

Deputy Director Ostry said, "South Korea had relatively very good growth among Asian countries last year due to appropriate monetary and fiscal policies," and "The recovery this year also seems to be generally well underway." However, he added, "There is still slack in resources that lowers cost pressures, and there is no evidence of inflation," recommending that the base interest rate be maintained at around 0.50% per annum.

Although inflation concerns have arisen as price increases have been detected in various indicators, the IMF's stance supports the view that it is still too early to discuss inflation in South Korea. Since South Korea is an export-driven economy, growth is expected to be high thanks to the global economic recovery, but there are still many idle workers in the labor market, making it difficult for sustained price increases to occur.

According to the Bank of Korea's announcement on the same day, the import price index last month was 109.73 (2015=100), up 3.4% from the previous month and 9.0% from the same month last year. This marks the first year-on-year increase in import prices in 14 months, with the largest rise since October 2018 (11.1%). The consumer price index last month also rose 1.5% year-on-year, recording the largest increase in 14 months. Typically, when import prices rise, consumer prices follow. Kim Young-hwan, head of the Bank of Korea's price statistics team, said, "Since private consumption trends are also reflected in prices, we need to observe further how much impact this will have on consumer prices."

"No evidence of inflation confirmed"
"South Korea's household debt and mortgage loans are at manageable levels"

At the press conference, the IMF also said that maintaining low interest rates is better for financial stability in South Korea. Deputy Director Ostry explained, "Including housing-related risks, we do not recommend raising interest rates to address financial stability risks," and added, "Although household loans have increased under the low interest rate environment, risks are limited thanks to macroprudential policies." Although household debt has risen to a level comparable to the country's gross domestic product (GDP), it is interpreted that raising interest rates now would increase borrowers' burdens and cause more harm than good.

Meanwhile, the IMF advised that South Korea's government debt requires detailed expenditure planning considering aging and medical cost burdens. While it is not necessary to raise the base interest rate due to concerns about private debt, the IMF pointed out that since government debt burdens may increase in the future, long-term plans are needed to use funds appropriately. The IMF expects South Korea's government debt to reach 69.7% of GDP by 2026.

Looking at Asian countries overall, the IMF advised that economic recovery speeds vary depending on tourism dependence and COVID-19 vaccine availability, and that the impact of U.S. monetary and fiscal policies should be closely monitored and prepared for.

Deputy Director Ostry pointed out, "If U.S. market interest rates rise faster than expected or if the Federal Reserve (Fed) fails in communication regarding monetary policy, capital outflows from financial markets could occur, damaging macro-financial stability, similar to the 2013 taper tantrum." He emphasized the need to prepare to prevent financial market shocks caused by sudden foreign currency outflows.

He also mentioned that it is important for Asian countries to establish a sustainable and eco-friendly economic base in addition to traditional trade and tourism industries in preparation for structural changes in the economy due to COVID-19. Deputy Director Ostry positively evaluated the Regional Comprehensive Economic Partnership (RCEP), which aims for a multilateral trade system in the Asia-Pacific region, as sending a very strong global signal, and welcomed the eco-friendly industrial policies of South Korea, China, and Japan.

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