Bank of Korea Governor Shin Hyun-song said on the 12th that inflation will stay above the central bank's 2% target for a considerable period, citing the continued pass-through of accumulated cost pressures and growing demand-side pressure. He estimated that next year's government budget proposal would add 0.5 percentage point to growth and 0.06 percentage point to inflation.
Shin made the remarks at a parliamentary audit held by the National Assembly's Finance, Economy and Planning Committee at the central bank's headquarters in Jung-gu, Seoul, where he said price gains would persist for the time being and stressed the effect of preemptive rate increases.
"We bought time by raising rates ahead of the United States," he said, adding that moving early reduces economic costs compared with raising rates defensively and belatedly under market pressure. The BOK raised its base rate in July and August, in two consecutive moves. By allowing the market to price in the possibility of rate increases in advance, the central bank spread out the shock of an abrupt adjustment, he said.
Shin projected that the inflation rate would exceed the BOK's 2% target for a considerable period. He judged that accumulated cost increases are being passed on to consumer prices and that demand-side pressure is also building. He maintained that any further rate increase would be decided after reviewing inflation, economic conditions and financial stability.
On the possibility of a policy mismatch between fiscal expansion and monetary tightening, he said the inflationary impact of the fiscal expansion is relatively limited. "The additional growth effect on GDP from next year's government budget proposal is 0.5 percentage point," Shin said. "The additional rise in the inflation rate is estimated at 0.06 percentage point."
Simply adding those figures to the BOK's August economic outlook would lift next year's growth rate to 3.4% from 2.9% and the inflation rate to 2.36% from 2.3%. A BOK official said, however, that the figures were estimated based on past experience and are not directly reflected in the official forecast.
Shin agreed that government spending could stimulate prices by boosting aggregate demand in the short term. But he said monetary and fiscal policy do not necessarily work at cross purposes if government spending raises the potential growth rate over the medium to long term. He added that transfer payments carry a relatively lower fiscal multiplier than other types of government spending.
He offered a positive outlook on the semiconductor sector, a mainstay of the domestic economy. Shin said the current chip boom could continue at least through next year. With exports and investment maintaining strong growth, consumption will also gradually recover as income conditions improve, he said.
He accepted criticism that the central bank had not responded adequately to overheating in financial markets. Referring to single-stock leveraged exchange-traded funds, Shin said, "We failed to warn sufficiently," adding, "I apologize to the public."