[Weekly Review] Bank of Korea "Will Raise Interest Rates Within the Year"... Concerns Over Policy Mismatch Between Monetary and Fiscal Measures

Lee Ju-yeol and Hong Nam-ki Deny 'Out of Sync'... "Will Work Complementarily"
Exports Increase 29.5% Until the 20th of This Month... 8 Consecutive Months of Growth

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] Lee Ju-yeol, Governor of the Bank of Korea, has officially confirmed an interest rate hike within this year. This comes amid growing concerns over the accumulation of financial imbalances and the prolonged rise in inflation. While the Bank of Korea signals the implementation of a loose monetary policy, the government is releasing funds, leading to controversy over the discord between monetary and fiscal policies.

◆ Bank of Korea officially confirms interest rate hike within the year... Controversy over discord between monetary and fiscal policies = Governor Lee stated at the inflation stabilization target briefing on the 24th, “It is necessary to orderly normalize monetary policy at a timely point within this year,” adding, “Normalizing the exceptionally loose monetary policy in line with the economic recovery is a natural process.” On this day, Governor Lee clearly conveyed the message of an ‘interest rate hike’ within the year to the market by specifying the timing as ‘within this year.’ Household debt is surging, asset prices are rising, and market imbalances are significantly expanding. Additionally, there are latent factors that could cause inflation in the medium term. While the Bank of Korea signals a loose monetary policy, the government is implementing an additional supplementary budget (Chugyeong) of up to 35 trillion won, continuing the controversy over the discord between monetary and fiscal policies. However, Governor Lee and Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki denied the ‘discord’ and emphasized mutual complementarity. Governor Lee explained, “Harmonious operation of monetary and fiscal policies does not necessarily mean operating in the same direction or with similar intensity,” adding, “Monetary policy aims to eliminate the side effects of prolonged low interest rates, and fiscal policy focuses support on vulnerable sectors, which is a mutually complementary and desirable policy combination.” Deputy Prime Minister Hong also emphasized, “Efforts to make the two policies complementary should naturally be enhanced, and please understand that the two policies are sharing appropriate roles,” adding, “We will strive to avoid excessive discord.”

◆ Overseas direct investment in Q1 plunges 21.6% = Following the first decline in six years due to the impact of COVID-19, South Korea’s overseas direct investment (ODI) in the first quarter also decreased by 21.6%. According to the Ministry of Economy and Finance’s ‘2021 Q1 Overseas Direct Investment Trends’ released on the 25th, ODI in Q1 this year was $11.22 billion, down 21.6% compared to the same period last year. Net investment, which excludes investment recovery amounts such as equity sales, loan investment recovery, and liquidation from total investment, was $7.65 billion, down 31.6% year-on-year. By industry, investments in wholesale and retail (-58.4%), real estate (-55.3%), and manufacturing (-14.3%) sharply declined. However, overseas direct investment in finance and insurance increased by 75.4% year-on-year due to some large-scale equity investments, and mining also rose by 45.0%. By country, investments in the United States (-18.8%) and Vietnam (-10.8%) decreased, and the decline continued in Canada (-79.8%) and Singapore (-49.0%). On the other hand, investments increased in tax haven regions such as the Cayman Islands (14.7%) and Luxembourg (32.9%), as well as in China (15.9%).

◆ Exports up 29.5% through the 20th of this month... 8 consecutive months of growth = Exports increased by nearly 30% through the 20th of this month, continuing a strong trend. Exports of South Korea’s main export items, semiconductors and passenger cars, rose by 29% and 62%, respectively. If this trend continues, the export growth that began in November last year is likely to continue for eight consecutive months. On the 21st, the Korea Customs Service announced that the export amount from June 1 to 20 (provisional customs clearance basis) was $32.4 billion, up 29.5% ($7.38 billion) from the same period last year. Reflecting this, the cumulative export amount for this year reached $280.8 billion, an increase of 24.1% ($54.51 billion) compared to the same period last year. Considering that the number of working days from June 1 to 20 this year was 15.5 days, 0.5 days fewer than the 16 days in the same period last year, the export growth rate is even steeper. The average daily export amount rose 33.7% from $1.56 billion last year to $2.09 billion this year. Imports also increased through the 20th of this month, reaching $32.1 billion, up 29.1% ($7.23 billion) year-on-year. Increases were seen in crude oil (124.6%), semiconductors (13.1%), machinery (2.6%), and petroleum products (99.1%). By country, imports increased from China (19.0%), the United States (25.6%), and the EU (13.5%).

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