Interest Rate Hikes More Dangerous Than Inflation
Sohn Jong-pil (ISC, Policy Team Director)
Translated by Alice S. Kim
There is much clamoring about rising prices. It’s true, the prices have risen too much. When prices rise, it is common people who suffer the most. The price of groceries rises everyday, but since incomes have stayed the same, it is an inevitable result that maintaining the household has become difficult.
Consumer prices, which began to rise rapidly from March of last year, increased by 5.0% as of December 2022, compared to the previous year. Compared to the same month the previous year, the prices rose 3.6% in January, then after breaking through the 5% mark in May and peaked at 6.3% in July. They then gradually began to decline, however they are still quite high. It is a high level of increase in numbers, but to the market it is bound to be felt even higher. The Bank of Korea predicts that the rate of inflation will continue to rise at around 5% through February, and maintaining the household will continue to be difficult for common people.
Inflation is not unique to South Korea. In the case of the United States, the consumer price index rose to 9.1% in June of last year. It fell to 7.1% at the end of December, of course, and has been showing a downward trend. The U.S. Department of Labor announced that the producer price index, which measures wholesale prices, decreased 1.1 percentage points from the largest increase of 7.3% in November to 6.2%. With the lowest rate of increase since March 2021, this trend can be seen as a sign that inflation is easing. Down 0.5% from the previous month, it is said to be the largest drop since April 2020. As a leading indicator of the consumer price index, the producer price index is being received as a positive sign that the consumer price index will also fall in the near future.
Rising prices have been seen as due to a problem in the global supply chain. The main reason is the rise in energy and food prices due to problems in the supply of natural gas and agricultural products resulting from the war in Ukraine. However, at the same time, the fact that during the COVID-19 pandemic, governments of various countries implemented an expansionary fiscal policy for the purpose of stimulating the economy, which released a lot of money into the market triggering a rise in prices, also played a big part.
Adding to the pain caused by inflation, the lives of common people in South Korea are becoming harder due to the burden of interest rates that are continuously being raised in order to control prices. Korea’s Monetary Policy Board keeps raising interest rates in order to curb inflation. Rising 0.25 percentage points on January 13, the seventh consecutive interest rate increase went up 3 percentage points since the lowest point in August 2021 to January of this year. Globally, interest rates have also been sharply raised to counter inflation. Whether as a big step or a giant step, the U.S. announced the interest hike through newly coined terms. Last November, the Bank of England in the UK raised the interest rate by 0.75 percentage points, the largest increase since 1989, and on December 15, it raised the base interest rate from 3.0% to 3.5%, leading to the ninth consecutive hike.
Korea has no choice but to raise interest rates in line with the global trend of interest rate hikes, but the situation in Korea is a little different from other countries. Hence the burden caused by the interest rate hike, even when taking into account some speculative elements, is causing financial difficulties to households and businesses. During the COVID-19 pandemic, the Korean government implemented a passive fiscal policy compared to other countries, resulting in a relatively low increase in national debt, but at the same time leading to rising debt for households and businesses experiencing economic hardship due to COVID-19. Other countries have begun to stimulate their economies by injecting huge amounts of finance by issuing government bonds. However, the Korean government, concerned about fiscal soundness, stopped providing pandemic financial assistance for a while in the name of policy funds, which took the form of government loans, increasing the debt to households and businesses. The result of the interest rate hike that is being undertaken as a countermeasure against the global phenomenon of rising prices after the pandemic is that it is leading straight to an interest burden. According to the Bank of Korea, when the base interest rate is raised by 0.25 percentage points, the interest burden is 3.3 trillion won. According to media reports that the interest burden has increased to about 40 trillion won resulting from the interest rate hikes, the pain is inevitably great.
In the capitalist system, the economy sometimes falls into recession and sometimes welcomes a boom. So the role of the government is important. The government’s passive intervention at the time of the COVID-19 pandemic does not stop there, but further leads to the suffering of common people following the interest rate hikes. The government is not presenting active countermeasures against the rate hike, which is more frightening than inflation. It is said that interest rates are being raised to control inflation, but the common people are suffering from both inflation and the interest rate hikes.