By Dr. Jeffrey I. Kim
During Oct. 16-18, central bank governors met together at the G30 International Banking Seminar to share ideas to fight rising global inflation. They agreed that the interest rates in major countries have been abnormally low due to quantitative easing (QE) policies. The consensus among the participants was that now is the time for every country to fight inflation.
After European Central Bank (ECB) President Christine Lagarde froze the ECB's base rate at the zero level, she said it would not be raised next year. According to her projection, inflation is going to be a little over 2 percent next year but will be stabilized at a level below the 2 percent target by 2024. Lagarde added that the ECB's base rate is unlikely to be raised next year.
People's Bank of China (PBOC) Governor Yi Gang stated at the same seminar that "Central banks should try their best to avoid asset purchases because in the long run they will damage market functions, monetize fiscal deficits, harm central banks' reputations, blur the boundary of monetary policy and create moral hazard."
Yi agreed that China confronts some common challenges such as surging energy prices and supply chain bottlenecks. He explained about the Chinese economy. He said the pandemic is under good control in China. About 80 percent of the Chinese population is under effective control. China's GDP grew by 12.7 percent year-on-year in the first of half of 2021 and is expected to grow around 8 percent for the whole year.
According to previous studies, Chinese supply and demand shocks affect prices in other countries significantly. The overall share of global inflation explained by Chinese shocks is about 5 percent on average over 38 countries but not more than 13 percent in each region for the period of 2002-2011. After the eruption of the COVID-19 pandemic, global inflation is expected to increase with growing uncertainty. He was concerned that China's inflation would necessarily be affected by the inflations of major trading partner countries.
On Nov. 22, U.S. President Joe Biden nominated Jerome Powell for a second term as the Federal Reserve chair. Prior to his reappointment, there was a consensus among the Fed officials that they needed to continue QE because inflation was likely to be transitory. But it has turned out prices are continuing to rise internationally.
After Powell was reappointed as Fed chair, he took a policy pivot shifting from the interest rate adjustment to inflation control. In October, Powell anticipated the problem of wage-price spiral. He noted that employers were paying more in wages and other costs to keep their workers and passing those increased costs on to customers.
Bank of Korea (BOK) Governor Lee Ju-yeol stated at a press conference recently that Korea's annual inflation rate is expected to exceed 2 percent for the first time since 2012. The consumer price index has accelerated to reach 3.7 percent in November this year. Strong inflationary pressure has been led by rising prices of raw materials including crude oil and increased food prices.
In addition, demand-side pressure is increasing as the economy recovers from COVID-19 shocks. Governor Lee emphasized that in Korea high inflationary expectations can lead up to higher wages and greater inflationary pressure. He, therefore, strongly hinted that early next year the BOK's key rate would be raised.
As of November, the expected inflation hit 2.7 percent whereas the interest rates have been at an abnormally low level. While the central bank is trying to keep its key interest rate at the normal level, it will raise the cost of borrowing from banks by producers and investors. This will raise inflationary pressure.
There are barely more than two months to go before the nation's presidential election scheduled for March 9, 2022. Due to the failure of Korea's real estate policy, housing prices, rents and lease payments have all gone up tremendously. Property taxes also went high. The housing markets have been frozen. The BOK's key rate hike may discourage short-term capital flight.
However, it is politically unwelcome because the increase in the key rate will raise the short- and long-term market interest rates. Most of the Korean people will suffer from much-increased interest payments associated with their household loans. Korea's inflation control is much harder.
Dr. Jeffrey I. Kim (ickim@skku.ac.kr), former foreign investment ombudsman, is a professor emeritus at Sungkyunkwan University. He earned a Ph.D. in economics at the University of Chicago and taught at the University of Colorado, Boulder, and the American University, Washington, D.C.
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After European Central Bank (ECB) President Christine Lagarde froze the ECB's base rate at the zero level, she said it would not be raised next year. According to her projection, inflation is going to be a little over 2 percent next year but will be stabilized at a level below the 2 percent target by 2024. Lagarde added that the ECB's base rate is unlikely to be raised next year.
People's Bank of China (PBOC) Governor Yi Gang stated at the same seminar that "Central banks should try their best to avoid asset purchases because in the long run they will damage market functions, monetize fiscal deficits, harm central banks' reputations, blur the boundary of monetary policy and create moral hazard."
Yi agreed that China confronts some common challenges such as surging energy prices and supply chain bottlenecks. He explained about the Chinese economy. He said the pandemic is under good control in China. About 80 percent of the Chinese population is under effective control. China's GDP grew by 12.7 percent year-on-year in the first of half of 2021 and is expected to grow around 8 percent for the whole year.
According to previous studies, Chinese supply and demand shocks affect prices in other countries significantly. The overall share of global inflation explained by Chinese shocks is about 5 percent on average over 38 countries but not more than 13 percent in each region for the period of 2002-2011. After the eruption of the COVID-19 pandemic, global inflation is expected to increase with growing uncertainty. He was concerned that China's inflation would necessarily be affected by the inflations of major trading partner countries.
On Nov. 22, U.S. President Joe Biden nominated Jerome Powell for a second term as the Federal Reserve chair. Prior to his reappointment, there was a consensus among the Fed officials that they needed to continue QE because inflation was likely to be transitory. But it has turned out prices are continuing to rise internationally.
After Powell was reappointed as Fed chair, he took a policy pivot shifting from the interest rate adjustment to inflation control. In October, Powell anticipated the problem of wage-price spiral. He noted that employers were paying more in wages and other costs to keep their workers and passing those increased costs on to customers.
Bank of Korea (BOK) Governor Lee Ju-yeol stated at a press conference recently that Korea's annual inflation rate is expected to exceed 2 percent for the first time since 2012. The consumer price index has accelerated to reach 3.7 percent in November this year. Strong inflationary pressure has been led by rising prices of raw materials including crude oil and increased food prices.
In addition, demand-side pressure is increasing as the economy recovers from COVID-19 shocks. Governor Lee emphasized that in Korea high inflationary expectations can lead up to higher wages and greater inflationary pressure. He, therefore, strongly hinted that early next year the BOK's key rate would be raised.
As of November, the expected inflation hit 2.7 percent whereas the interest rates have been at an abnormally low level. While the central bank is trying to keep its key interest rate at the normal level, it will raise the cost of borrowing from banks by producers and investors. This will raise inflationary pressure.
There are barely more than two months to go before the nation's presidential election scheduled for March 9, 2022. Due to the failure of Korea's real estate policy, housing prices, rents and lease payments have all gone up tremendously. Property taxes also went high. The housing markets have been frozen. The BOK's key rate hike may discourage short-term capital flight.
However, it is politically unwelcome because the increase in the key rate will raise the short- and long-term market interest rates. Most of the Korean people will suffer from much-increased interest payments associated with their household loans. Korea's inflation control is much harder.
Dr. Jeffrey I. Kim (ickim@skku.ac.kr), former foreign investment ombudsman, is a professor emeritus at Sungkyunkwan University. He earned a Ph.D. in economics at the University of Chicago and taught at the University of Colorado, Boulder, and the American University, Washington, D.C.
