Ministry of Economy and Finance Draws a Line: "Too Early for Changes in Prices → Economy and Policy Direction"

On the 23rd, as the Bank of Korea kept the base interest rate steady at 3.5% per annum, voices have emerged hoping that South Korea's economic policy stance might shift from 'price stability' to 'economic stimulus.' However, the Ministry of Economy and Finance reiterated its position that "price stability remains the top priority" and that "there will be no immediate change in policy direction."

On the 24th, Bang Ki-seon, the first vice minister of the Ministry of Economy and Finance, presided over the 18th Emergency Economic Vice Ministers' Meeting at the Government Seoul Office and emphasized price stability in his opening remarks, stating, "Inflation is still hovering around the 5% level."

Vice Minister Bang said, "The employment growth rate is shrinking, and the inflation rate remains at around 5%," adding, "Exports are also declining, creating a challenging economic environment." This implies that although the economic situation is difficult, the essential prerequisite for shifting the policy stance to economic stimulus?'price stability'?has not yet been met.

Despite inflation continuing its high trajectory, calls for the government to focus on economic stimulus persist because the economy is facing significant difficulties.

First, exports, which accounted for 35.6% of South Korea's gross domestic product (GDP) in 2021, have been declining for four consecutive months through January of this year. In particular, the trade balance is expected to record a deficit for 12 consecutive months from March last year through February this year.

The labor market is also increasingly freezing up. In January this year, the number of employed persons increased by only 411,000 compared to the same month last year, marking the eighth consecutive month of a shrinking growth rate.

Ultimately, the Ministry of Economy and Finance, the main agency responsible for economic policy, officially acknowledged the economic slowdown in its February Recent Economic Trends report (Green Book) released on the 17th, stating that "economic momentum has slowed."

Furthermore, when Lee Chang-yong, the governor of the Bank of Korea, cited the "downward stabilization outlook for inflation" as one of the main reasons for keeping the base rate unchanged, some analysts suggested that "the Bank of Korea might have judged that responding to the economic slowdown is more necessary than focusing on price stability." Governor Lee explained, "The inflation path was an important factor in this decision (to hold rates). From March, the inflation rate is expected to fall to the 4% range, and this trend is expected to continue, reaching the low 3% range by the end of this year." However, he also noted, "If inflation does not fall faster than we expect, we may not lower interest rates further."

The government's shift in economic policy stance is expected to be possible only in the second half of this year, as previously mentioned by Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho. On the 10th, Deputy Prime Minister Choo said, "From a macro perspective, we need to focus on price stability for the time being. While firmly maintaining the price stability stance, the situation increasingly requires attention to economic issues." Although this statement implies the need to place more weight on the economy in the future, it also reemphasizes that policy changes are possible only when the premise of "firm price stability" is met.

An official from the Ministry of Economy and Finance said, "The Deputy Prime Minister has said that a clear stabilization of prices is necessary before a policy shift toward economic stimulus is possible, but it is difficult to say that prices are currently stable," adding, "First, the slowdown in inflation rates shown through consumer price trends must be confirmed numerically."

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