New Bank of Korea Governor Shin Hyun-song said at his inauguration ceremony on the 21st that "uncertainty over the paths of inflation and growth has increased further due to the supply shock from the Middle East war," adding that "we must pursue price stability and financial stability through prudent and flexible monetary policy operations." He also signaled his intention to treat structural factors as an important part of monetary policy, noting that "the growth engine of our economy is weakening due to demographic changes, deepening polarization, and problems in the real estate market and household debt."
In his inaugural address, Shin mentioned "growth" six times, more than "prices," which he mentioned four times. This suggests that the economic growth slump is severe enough to concern the central bank, whose primary duty is defending price stability. The structural low-growth problem facing the Korean economy is serious enough to have appeared in the farewell address of former BOK Governor Rhee Chang-yong the previous day. Rhee said, "Issues such as low birth rates and low growth require structural reform to reconcile interests and conflicts, rather than short-term remedies." This can be seen as a warning that the BOK's benchmark interest rate decisions (monetary policy) and the government's supplementary budget and other fiscal measures are merely "short-term remedies," and these alone cannot lift the falling growth rate of the Korean economy.
Signs are becoming clear that the "three highs" phenomenon stemming from the Middle East — high oil prices, high inflation, and a high exchange rate — is solidifying into a new normal. Clouds of stagflation, meaning rising prices amid economic recession, are also thickening. If a prolonged war in Iran sends waves of compound crises crashing in, there is growing concern that the 2.0 percent growth target for this year, set by both the government and the BOK, will fail to be achieved.
Catching both rabbits of "growth" and "prices" is no easy task. Nevertheless, to restore growth momentum, structural reform must be accelerated. The government must create a business-friendly environment through regulatory innovation and labor reform, and qualitatively upgrade the economic structure through tax benefits and subsidies for advanced future industries. The BOK must also play its own role in addressing the structural factors of the Korean economy. Of course, in our reality where political influence is strong, it will not be easy for the BOK to maintain a resolute stance. We hope Governor Shin will work closely in step with government policy while upholding the principle that structural reform is a prerequisite for sustainable growth.
