Fiscal vs. monetary in age of uncertainty

South Korea under a new government is sinking deeper into a crisis-like situation. The economy is battered by the so-called three highs, high interest rates, a strong dollar and high inflation..

South Korea under a new government is sinking deeper into a crisis-like situation. The economy is battered by the so-called three highs, high interest rates, a strong dollar and high inflation.

The dollar is nearing 1,300 won due to the accelerated strengthening of the dollar with the Federal Reserve set to raise rates fast.

The Kospi, which closed last year above 3,000, has sank to around 2,600 as foreign funds flee. Household debt of over 1,860 trillion won may be a ticking bomb due to rising interest rates.

Prices across the board are reaching new heights. India, the world’s second largest wheat producer, is prohibiting wheat exports apart from exceptional government approvals.

Ukraine, one of the world’s biggest grain suppliers, has become barren under Russian bombardment. Food prices around the world are shooting up and fanning inflation.

Indonesia, the world’s biggest palm oil supplier, last month stopped outbound shipments of palm oil. Food protectionism is spreading amid supply shortages.

Choo Kyung-ho, deputy prime minister and finance minister, met with Bank of Korea governor Rhee Chang-yong for the first time since both took office.

The fiscal and monetary chiefs agreed the Korean economy was in a grave state in need of a “comprehensive policy response.”

Fiscal and monetary policy leaders vowing to take a common stance to address challenges is rare but necessary in the face of perilous climate at home and abroad.

Despite their rhetoric, fiscal and monetary policies are moving in the opposite direction. The central bank has hinted of more increases in the base rate after two hikes this year.

The government has submitted a record supplementary budget of nearly 60 trillion won. Rhee, after his meeting with Choo, said a “big-step” (a hike in 50 basis points) cannot be ruled out, depending on price and growth conditions.

The Korea Development Institute (KDI) raised concerns about faster rises in interest rates to match the strides in the U.S.

It advised an independent monetary policy according to Korean prices and economic conditions. The inflation problem is connected with interest rate and exchange rate movements.

Fiscal and monetary authorities must maintain close and swift cooperation while the government maintains watch and controls food import prices.