Korea should refrain from policies that stimulate inflation

[Photo by Yonhap]

South Korea faces concerns about policies that stimulate inflation.

The Korea Development Institute (KDI) cautioned against policies that could disrupt the trend of price stability, such as large-scale stimulus packages.

Fitch Ratings Inc., a prominent global credit rating agency, has also cautioned against the main opposition Democratic Party’s proposal for cash subsidies, citing the potential to exacerbate inflationary pressures.

The KDI identified high interest rates as the key factor hindering domestic consumption despite the recent upturn in exports.

The analysis said while a jump in exports is likely to spur investment and domestic consumption, today‘s high interest rates have continued to serve as a barrier to consumption rebound.

According to the analysis, a one percentage point increase in the policy rate results in a 0.7 percentage point decline in consumer spending and a 2.9 percentage point decrease in capital expenditure after three quarters, with the effects lingering for another eight to nine quarters.

Any threat to price stability could delay rate cuts and consumption recovery further, the agency warned.

Concerns rise about inflationary pressures as the Democratic Party proposed 13 trillion won ($9.4 billion) in government spending for cash subsidies, which offers 250,000 won per individual, and an additional 15 trillion won for interest reduction on loans to self-employed businesses.

The monetary stimulus, however, could push inflation further up amid prevalent volatility in oil and agricultural prices.

Rather than pursuing a broad-scale stimulus approach, the focus should shift towards targeted measures to rein in inflation.

Any additional spending on stimulus packages risks prolonging the delay in rate cuts and undermining the country’s credibility.