The Bank of Korea Raises Interest Rates While the Government Pumps Money... Growing 'Out-of-Step' Controversy

Government "Complete Economic Recovery" VS Bank of Korea "Interest Rate Hike Within the Year"

[Asia Economy Reporter Jang Sehee] While the government has announced large-scale fiscal spending, including cash support, to stimulate the economy in the second half of this year, the Bank of Korea is expected to tighten the money supply by raising the base interest rate within the year. As fiscal and monetary policies move in opposite directions, concerns over a 'policy mismatch' are expected to intensify.

According to the 'Economic Policy Direction for the Second Half of the Year' announced by the Ministry of Economy and Finance on the 28th, the government stated it will actively inject fiscal funds through measures such as the establishment of the Win-Win Consumption Support Fund and the expansion of the issuance of local love and Onnuri gift certificates. The aim is to revive consumption and invigorate domestic demand through the so-called 'COVID-19 Overcome Win-Win 3-Package.'

While the government supplies liquidity through various policies, the central bank is tightening the money supply, resulting in a policy mismatch.

Government and Bank of Korea Aim to Prevent 'Policy Mismatch' Concerns... "Complementary Policy Mix"

Lee Eok-won, First Vice Minister of the Ministry of Economy and Finance, said, "The combination of fiscal and monetary policies is not fixed," adding, "I believe there are various forms of policy mixes that can be slightly adjusted depending on the economic situation."

He continued, "Fiscal policy can target specific areas, so support will focus on vulnerable groups, while monetary policy may place more emphasis on addressing financial imbalance accumulation. This could be a form of policy mix." This means that some fiscal support is inevitable because the recovery of vulnerable groups is slow.

Lee Ju-yeol, Governor of the Bank of Korea, also stated, "This is not a policy mismatch but a complementary operation." He emphasized, "The overall economic recovery speed is strong, but the recovery speed varies by sector, so monetary policy must eliminate side effects caused by prolonged low interest rates. Fiscal policy should focus on uneven recovery and support areas vulnerable to COVID-19, which is a desirable complementary policy mix between monetary and fiscal policies."

However, as consumption stimulation measures targeting the entire population are being promoted beyond support for vulnerable groups, concerns have been raised that excessive liquidity supply could fuel inflationary pressures.

One reason the Bank of Korea announced it would raise interest rates within the year is the sharp rise in inflation. In fact, the Bank of Korea forecasted that inflation in the second half of the year would fluctuate around 2%.

The government projected inflation rates of 1.8% this year and 1.4% next year. Vice Minister Lee said, "In the second half, new crops will come in, and the base effect on petroleum products will ease. However, there are many risk factors regarding oil prices, so we need to keep monitoring."

Government's Money Injection → Inflation Rise → Interest Rate Response Sequence

Experts foresee growing inflation concerns due to excessive fiscal pressure.

Professor Kim Sang-bong of Hansung University’s Department of Economics said, "The government is injecting money to stimulate inflation, while the Bank of Korea continues to send tightening signals. Fiscal and monetary policies appear to be conflicting. Due to global economic recovery, demand-side inflationary pressures could increase further."

Professor Kim So-young of Seoul National University’s Department of Economics said, "If fiscal spending is excessive, inflationary pressure will increase, so it seems the Bank of Korea is also considering raising the base interest rate."

Professor Sung Tae-yoon of Yonsei University’s Department of Economics pointed out, "Depending on how interest rate policy is handled in the second half of the year, inflation in the first half of next year could be affected. If interest rates are adjusted, upward inflationary pressure can be eased. It is more meaningful to focus fiscal spending on vulnerable groups with low income rather than distributing it to the entire population."

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