The Bank of Korea Warns of Risk Realization in Vulnerable Sectors if Economic Slump Prolongs

'Evaluation and Implications of Our Economic Situation After Interest Rate Hikes' Report
Potential Inflation, Economic Downturn, and Financial Instability

The Bank of Korea warned that prolonged economic sluggishness amid sustained high interest rates could lead to the materialization of risks in vulnerable sectors.

On the 25th, the Bank of Korea stated in its report titled "Assessment and Implications of Our Economy After Interest Rate Hikes," released along with the revised economic outlook, that "while the interest rate hike cycles of major countries are gradually coming to an end, the relatively high level of interest rates is likely to persist for a considerable period, causing risks to continue accumulating."

According to the report, following the domestic and international interest rate hikes that began during the normalization process after the COVID-19 pandemic, the Korean economy experienced a deepening economic downturn centered on IT manufacturing and exports. However, the Bank of Korea assessed that economic agents have buffered the shock of interest rate hikes better than initially feared. Although households and businesses were quickly affected negatively, pandemic-related special factors, excess savings, and employment stability acted as cushioning factors. Additionally, despite financial market tightening in the fourth quarter of last year, the overall stability of the financial system helped the Korean economy withstand the shock.

The Bank of Korea forecasted that although downward pressure on growth remains significant due to delayed recovery in IT and major exports, domestic demand is expected to alleviate some of the downward pressure on the economy, which may result in a slower pace of core inflation easing. In particular, the direction of the domestic economy will largely depend on how quickly the IT sector rebounds, which in turn hinges on the timing of the end of the global interest rate hike trend.

Furthermore, the Bank of Korea pointed out that as high interest rates persist, the buffering capacity of economic agents is diminishing, raising concerns that risks in vulnerable sectors could materialize if the economic downturn prolongs. The report stated, "Potential risks are interconnected across sectors, and with the overall reduction in private buffering capacity, if risks in vulnerable sectors materialize, they could spread to other sectors." It analyzed, "From this perspective, the domestic economy harbors risks of inflation, economic downturn, and financial instability simultaneously." The recovery centered on face-to-face services and various support measures, which have helped cushion shocks so far, may, in the medium to long term, contribute to lowering overall economic productivity due to increased employment in low-productivity sectors and the persistence of marginal firms.

The Bank of Korea emphasized, "Given the high uncertainty ahead, it is necessary to closely monitor changes in risks related to the economy, inflation, and financial stability through incoming data and manage policies accordingly." It added, "At the same time, efforts toward medium- to long-term structural reforms, such as fostering new growth industries and diversifying supply chains, need to be further strengthened with a longer-term perspective."

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