[Gangnam Perspective] The Heavy Burden on the Incoming BOK Governor

"International oil prices at 110 dollars per barrel, the exchange rate at 1,501 won per dollar."
That was the headline of this newspaper on the 20th. The lead stories in other media were not much different. More than three weeks after the Middle East crisis erupted, the situation has escalated from military clashes into an "energy war," putting price stability on emergency alert. After the Islamic Republic of Iran closed the Strait of Hormuz and began concentrated attacks on energy facilities in neighboring countries, nations like ours and Japan, which rely on the Middle East for crude oil and liquefied natural gas (LNG), have grown deeply anxious. Hardly a day goes by without hearing, "The price of A has jumped 30%" or "No one knows when the supply of B will be cut off." On top of the shock from the United States of America (U.S.) tariff policy, the Middle East crisis has pushed the entire world to the brink of an economic fever.
For a country like ours, which is highly dependent on imports, inflation takes a direct hit from rising raw material prices, higher transport costs, and supply instability. On top of that, the rise in the won–dollar exchange rate adds fuel to the fire. In February, import prices in won terms rose 1.1% from the previous month. They have now increased for eight consecutive months since last July, the longest stretch since the 12-month rise from August 2007 to July 2008. Higher exchange rates and oil prices have increased upward pressure on prices. Once the impact of the Middle East crisis that began this month is fully reflected, inflation could accelerate much more sharply.
The government has declared a war on inflation, launching the Special Management Task Force for Consumer Prices. It has introduced a cap on oil prices and, after uncovering collusion, pushed down prices one after another for flour and cooking oil, as well as ramen, snacks, bread, and ice cream. Kang Hoon-sik, Chief of Staff to the President of the Republic of Korea, visited the United Arab Emirates (UAE) as a special envoy for strategic economic cooperation and secured an agreement to prioritize the import of a total of 24 million barrels of crude oil in two tranches. Above all, the most effective tool for taming inflation is the central bank’s monetary policy. Tightening through interest rate hikes is the most powerful weapon against rising prices, even though it can be a heavy drag on economic recovery. The Federal Reserve System (Fed) has kept rates on hold for two consecutive months, and the Bank of Korea (BOK) has frozen its policy rate at 2.50% for nine straight months, all in the name of price stability.
For now, inflation is relatively stable around the BOK’s 2% target. But if international oil prices hover near 110 dollars and the won–dollar exchange rate stays in the 1,500-won range, some analysts believe the BOK could start raising its policy rate as early as the third or fourth quarter to keep inflation expectations in check.
In fact, in major economies, expectations for interest rate cuts have faded, while forecasts of rate hikes are gaining ground. The Reserve Bank of Australia (RBA) raised rates on the 17th, already shifting its policy stance toward tightening. On Wall Street, leading investment banks such as JPMorgan Chase & Co., Morgan Stanley, and Barclays PLC have recently revised their outlooks, now predicting that the European Central Bank (ECB) will abandon rate cuts and instead raise rates up to three times this year. The supply chain disruptions and oil price surge triggered by the Middle East crisis are the main reasons. As with other central banks, the top priority for the BOK is "price stability." Article 1, Paragraph 1 of the Bank of Korea Act clearly states that the purpose of the BOK’s establishment is "to promote price stability." The burden on Hyun-Song Shin, the nominee for the next BOK governor, has grown that much heavier.
This shows just how urgent our economic situation is. If the current environment of high inflation and high interest rates persists, household consumption and corporate investment will both contract, inevitably sending shockwaves through the real economy. The Ministry of Finance and Economy has warned of "downside risks to growth" in The Green Book: Current Economic Trends, and some are even calling for a revision of this year’s growth target of 2.0%. The government is pushing for a war supplementary budget of up to 20 trillion won, but fiscal policy alone has its limits. The judgment is that it is unavoidable to pursue monetary policy in parallel to stabilize prices and the exchange rate. There is hope that the assessment of Hyun-Song Shin as "the right person to simultaneously achieve price stability and economic growth amid heightened uncertainty in the global economy due to the Middle East crisis" will prove true in practice.
blue73@fnnews.com Reporter