S Korea could have prolonged high inflation period, says Bank of Korea

[SEOUL] South Korea could have a high inflation rate for a prolonged period of time along with other countries as upside risks to prices rise, said Bank of Korea (BOK) analysts.

The expansionary fiscal policies and abundant liquidity in global markets provided during the pandemic will continue to accelerate inflation as there is a "time lag" of those policies, said a report by 5 analysts at the central bank released on Sunday (Apr 17).

Concerns are growing that the supply disruption in China - South Korea's biggest trade partner - may last a long time, adding to worries over surging commodity prices amid Russia's invasion of Ukraine, they said.

The BOK needs to take monetary policy measures to curb inflation and soothe worries of economic participants over rising consumer prices, the analysts said. If the bank does not take active steps to combat price increases, it may cause "huge damage" on the stability of South Korea's macroeconomy, they said, citing stress tests they had conducted.

South Korea's plan for relaxing social-distancing measures will add to inflationary pressures as consumer spending will likely recover to pre-Covid levels, the report said.

The South Korean central bank hiked its key policy rate by a quarter percentage point last week to 1.5 per cent despite the absence of a governor. While inflation remains a key factor for future rate decisions, it is hard to ignore the risk of an increase on economic growth, Joo Sang-yong, acting chairman of the policy committee, said at a press briefing.

Rhee Chang-yong, nominated to be the next BOK governor, also said the monetary authority needs to contain inflation, Yonhap News reported, citing a statement by him on Sunday sent to lawmakers on his opinions on a rate hike. The BOK needs to "adjust the level of easing" in its monetary policies as high inflation in South Korea is expected to "continue for quite a long period", he was quoted as saying by Yonhap. Rhee also said that he supported the latest rate hike by the BOK.

When asked if the bank's potential rate hikes at the upcoming meetings would be inconsistent with president-elect Yoon Suk-yeol's extra budget plan, Rhee said he will make efforts to communicate with the new government, Yonhap reported. BLOOMBERG