[Weekly Review] Ukraine Crisis 'Spreading Like Wildfire'... Inflation Hits Highest in 10 Years

Bank of Korea Projects 3.1% Inflation Rate This Year, Up from Previous 2%
International Oil Prices Temporarily Surpass $100...Concerns Over 'Stagflation'
Base Interest Rate Held at 1.25%...Economic Growth Outlook Revision Inevitable

When Will Price Stability Be Achieved?
(Seoul=Yonhap News) Reporter Ryu Young-seok = Amid ongoing price increases, citizens are shopping at a food section in a Seoul supermarket on the 24th.
The Bank of Korea presented a revised economic outlook on the day, projecting this year's consumer price inflation rate at 3.1%. It is the first time since April 2012, when the inflation rate forecast was 3.2%, that the Bank of Korea has projected a consumer price inflation rate in the 3% range for the current year. 2022.2.24
ondol@yna.co.kr
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[Asia Economy Sejong=Reporter Lee Jun-hyung] The Bank of Korea expects this year's consumer price inflation rate to reach its highest level in 10 years. This is due to the surge in international oil prices caused by the Ukraine crisis. The Bank of Korea is likely to continue a hawkish (monetary tightening preference) monetary policy until next year to stabilize prices.

At its Monetary Policy Board meeting on the 24th, the Bank of Korea revised upward its 2022 February Economic Outlook report, raising this year's consumer price inflation rate forecast from 2% to 3.1%, an increase of 1.1 percentage points. Previously, in November last year, the Bank of Korea had forecast a 2% inflation rate for this year. However, due to global supply chain disruptions leading to price increases in the U.S. and geopolitical risks such as the Ukraine crisis, the Bank revised its forecast within about two months.

Inflation Rate Forecast for Next Year Also at 2%

This is the first time since April 2012 (3.2%) that the Bank of Korea has projected a 3% inflation rate for the current year. If the Bank's forecast materializes, it will be 0.6 percentage points higher than last year's inflation rate (2.5%). The Bank's projection of a 3% inflation rate after about 10 years indicates significant concerns about economic deterioration due to inflation.

The Bank of Korea also raised its inflation forecast for next year from 1.7% to 2%, an increase of 0.3 percentage points. Consumer prices have exceeded the Bank's inflation target of 2% for three consecutive years from last year through next year. Last month, the domestic consumer price index was 104.69, up 3.6% compared to the same month last year. Consumer prices have maintained a 3% inflation rate for four consecutive months since October last year.

The problem is that military tensions surrounding Ukraine are escalating to the highest level, which could further destabilize prices. If rising international oil prices, supply chain instability, and price increases coincide, it could lead to stagflation, where inflation occurs amid economic recession. With Russia's military intervention in Ukraine, international oil prices briefly surpassed $100 per barrel. According to an analysis by Hyundai Research Institute, if international oil prices rise to $100, economic growth will decrease by 0.3 percentage points, and the current account balance will shrink by $30.5 billion.

Governor Lee Ju-yeol of the Bank of Korea Striking the Gavel
(Seoul=Yonhap News) Lee Ju-yeol, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee plenary meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of February 24, 2022. 2022.2.24 [Provided by Bank of Korea. Resale and DB prohibited]
Photo by Yonhap News
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Base Interest Rate Held Steady

At the monetary policy decision meeting on the same day, the Bank of Korea's Monetary Policy Board kept the base interest rate at the current 1.25%. Previously, the Board had lowered the base rate to a historic low of 0.5% until May last year, then raised it by 0.25% each in August and November of the same year, and again in January this year.

Given the soaring inflation, there is a possibility that the Bank of Korea will adopt a policy of raising the base interest rate in the future. Although this decision avoided the first-ever 'three consecutive base rate hikes,' the inflation rate is rising faster than expected, and the U.S. Federal Reserve's rate hike is imminent. Some analyses suggest that the Bank of Korea could raise the base interest rate to the 2% range within this year.

The economic growth forecast for this year remains at 3%. This reflects the Bank's calculations considering the Ukraine crisis. However, a revision of this year's growth forecast seems inevitable. The Bank's consideration of the Ukraine crisis did not include full-scale armed conflict or economic sanctions. International credit rating agency Moody's has already lowered South Korea's economic growth forecast from 3.2% to 3%, a 0.2 percentage point decrease.

Exports Decreased by 12.6% from February 1 to 10 Due to Reduced Working Days During Lunar New Year Holiday
(Busan=Yonhap News) Photo by Kang Deok-cheol = On the morning of the 11th, container handling operations are underway at Sinsundae Pier, Busan Port. The Korea Customs Service announced on the 11th that the export amount (provisional customs clearance basis) from February 1 to 10 was 15.7 billion dollars, down 12.6% compared to the same period last year. The number of working days during this period was 6.5 days, two days fewer than last year. Last year, the Lunar New Year holiday was from February 11 to 13, but this year it was about ten days earlier. Considering the number of working days, the average daily export amount increased by 14.2%. 2022.2.11
kangdcc@yna.co.kr
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Trade Deficit Continues

Exports from the 1st to the 20th of this month increased by 13.1% compared to the same period last year. Due to increased imports of energy such as crude oil and coal, the trade balance remained in deficit.

According to the Korea Customs Service, exports from the 1st to the 20th of this month amounted to $34.3 billion, a 13.1% ($3.96 billion) increase compared to the same period last year. The number of working days during this period was 13.5, 0.5 days fewer than the same period last year. Considering working days, the average daily export value increased by 17.2% compared to the same period last year.

By major items, exports increased for semiconductors (18.1%), petroleum products (56%), and passenger cars (10.9%). Exports decreased for wireless communication devices (-17.7%) and automobile parts (-11%). Exports to China (12.4%), the U.S. (7.0%), the European Union (2.8%), Vietnam (22.4%), Japan (4.5%), and Taiwan (22.5%) increased, while exports to Hong Kong (-3.5%) and India (-1.7%) decreased.

The trade balance recorded a deficit of $1.679 billion. The trade deficit for the same period last year was $1.542 billion. This means the deficit widened by $137 million over the past year. The cumulative trade deficit for this year is $6.514 billion.

If the trade deficit continues through this month, it will be the third consecutive month of deficit. This is the first time in about 13 years since the global financial crisis in 2008. The continued trade deficit is largely due to the sharp rise in energy prices, which have a high import dependency such as crude oil. From the 1st to the 20th of this month, crude oil imports amounted to $4.886 billion, a 54.8% increase compared to the same period last year.

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