Korea's money supply rises in record pace for leveraged investment: BOK

[Graphics by Song Ji-yoon]

Money supply in South Korea has risen by a record pace this year largely for leveraged investment rather than economic activities, adding to already-high inflationary pressures and household debt which are cited as biggest risks to the country’s financial system, according to the country’s central bank.

According to the monetary policy report to lawmakers, the Bank of Korea (BOK) said the money supply in the country has expanded at a fast clip driven by the steady loan demand from households and companies for housing transactions and battle against the prolonged-pandemic.

The central bank’s data showed the nation’s M2 growth rate reached 11-12 percent on year in the second half of this year, well above the nominal GDP growth rate of about 6 percent during the same period.

M2 is a key gauge of money supply that includes cash, checking deposits and easily convertible near money such as money market fund (MMF), installment savings, certificates of deposits and repurchase agreements (RP) with a maturity of less than two years.

“Asset price factors such as housing prices have played bigger roles than real growth factors in the latest growth streak in the country’s money supply,” said a central bank official.

The BOK warned there is a higher risk of excessive funds being funneled back to the already overheated property market if the current rate of growth is sustained.

Worries about inflation are also on the rise. The country's consumer price index gained 3.7 percent in November from a year earlier, the fastest rise in nearly a decade. The average global inflation rate of 34 major economies came to 4.39 percent as of October, a record-high since the 2008 financial crisis.

According to the central bank’s report, the correlation coefficient between the global inflation rate and the domestic consumer price has climbed to 0.78 in the 2010-2021 period compared to 0.28 between 2000 and 2007. A one percentage point rise in global inflation translates into 0.26 percentage points rise in domestic prices in 2010-2021, versus 0.1 percentage point rise in 2000-2007.

A recent survey of 80 financial experts conducted by the BOK said household debt, inflation and uncertainties over global monetary policies including the U.S. Federal Reserve’s tapering plan pose as the biggest risks to the country’s financial system.

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