Stronger and realistic policy measures are needed to curb soaring prices and avert an impending crisis
High-ranking government officials are often quick to cast as optimistic an outlook as possible, but slow to admit a looming crisis. But there are some exceptions, such as the comment made by President Yoon Suk-yeol on Monday.
Yoon admitted that there are few fundamental solutions to the current economic challenges as countries around the world raise interest rates to curb rising inflation.
In a striking move to tame inflation, the US Federal Reserve raised its benchmark rate by three-quarters of a percentage point to a range of 1.5% to 1.75% last Wednesday, marking the highest rise since 1994. The so-called “giant leap” came after US inflation hit 8.6% in May, the fastest pace since 1981.
The European Central Bank has announced it will raise interest rates for the first time in 11 years next month to control inflation in the euro zone, which hit a record 8.1% in May.
Inflationary pressure is building everywhere due to rising demand, supply chain disruptions, rising energy and commodity prices, and the protracted war between Russia and Ukraine .
To combat runaway inflation, a growing number of central banks are raising interest rates, watching the Fed’s decision closely, amid growing concerns about the side effects of aggressive rate hikes.
South Korea is not immune to such strong external headwinds. The country’s consumer prices jumped 5.4% year-on-year in May, the fastest rise in nearly 14 years, after peaking 4.8% in April. In an effort to control inflation, the Bank of Korea raised its key rate by a quarter of a percentage point to 1.75% in May.
The BOK is now expected to raise the rate in its upcoming rate-setting meetings, especially as inflation picks up further. On Tuesday, the central bank said in a report that Korea could see its highest inflation rate since 2008, when the figure was 4.7%, largely due to the mismatch between higher demand and a restricted offer. The updated projection came after the BOK had already revised up its inflation forecast for this year from 3.1% to 4.5% last month.
“There have been quite a few changes in the inflation situation,” BOK Governor Rhee Chang-yong told reporters on Tuesday. “Now that inflationary pressure at home and abroad is likely to continue, the country could end up with high inflation if we fail to properly control inflation expectations.”
The question is whether the South Korean government is doing enough to keep inflation expectations from skyrocketing. On Sunday, he unveiled a package of measures to tackle inflationary pressures, such as extending tax cuts on fuel consumption and doubling income tax deduction rates for fuel use. 80% public transport.
Finance Minister Choo Kyung-ho said the government would freeze utility tariffs including railway and postal service charges in the second half of this year and minimize tariff hikes for electricity and gas bills.
But the issue of electricity tariffs, which directly affects loss-making state power company Korea Electric Power Corp., is no easy task. The Ministry of Finance was due to announce details of the rate hike on Tuesday but suddenly delayed the timetable, apparently unhappy with Kepco’s proposal for a 2.7% hike from the third quarter.
One of the reasons is that consumer prices, which are expected to remain above 5% in the coming months, could exceed 6% if the government accepts Kepco’s request. After all, piecemeal electricity rate hikes would not help solve the structural problems of Kepco, which suffered 7.78 trillion won ($6.03 billion) in operating losses in the first quarter of this year.
Critics say the new measures unveiled by the government are far from enough to bring inflation under control, let alone solve Kepco’s problems. Even if there are few fundamental solutions, Yoon and policymakers should take stronger action to try to steer the country away from a deeper crisis.