Korea’s Government Sees Inflation Outpacing BOK Projections

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South Korea’s government expects inflation to outpace the central bank’s current forecasts for next year as supply disruptions persist and services spending rebounds, echoing concerns shared by global policy makers that prices will prove harder to tame.  

In its 2022 outlook released Monday, the finance ministry projected inflation at 2.4% this year and 2.2% for 2022, both higher than the Bank of Korea’s latest forecasts and its 2% target.

The ministry sees the economy expanding 4% this year and 3.1% next year as it continues to rebuild momentum from the pandemic, helped by front-loaded government spending. 

At this stage, the government doesn’t see a need for an extra budget early next year, Finance Minister Hong Nam-ki said at a press briefing following the release of the outlook. 

The growth forecasts are largely in line with the BOK’s view.  

Korea’s recovery from the pandemic so far has been led by exports, but consumption is expected to make a greater contribution next year as pent-up demand is unleashed and a gradual shift to living with Covid continues. 

“South Korea’s economy is expected to continue a robust recovery next year, with growth more evenly balanced between domestic demand and exports,” Vice Finance Minister Lee Eog-won said at an earlier briefing. “But multiple global risks are heightening uncertainties over growth, inflation and capital flows.”  

The outlook will depend to a large extent on how the pandemic develops and the spread of variants like omicron. A recent jump in local infections prompted the government to re-tighten virus rules as the medical system came under pressure.

Prolonged global supply bottlenecks and an acceleration in global monetary policy normalization are other risk factors, the government said. 

The 2022 policy direction, released alongside the government’s outlook, will be the last from President Moon Jae-in’s administration. Moon is set to step down in May next year as his single, five-year term ends.  

Responding to a question on calls from leading presidential candidates for fiscal stimulus, Hong said the government will first focus on implementing the 2022 budget.  

To support growth momentum, the government said it will bring forward 63% of planned fiscal spending to the first half of next year and ensure a soft landing as temporary financial supports are pared back. 

Read More: Bank of Korea’s Lee Plays Down Need to Follow Fed’s Rate Pace

The ministry also said it expects monetary policy will be adjusted appropriately while considering growth, inflation, financial imbalances and global policy shifts. 

The BOK has already hiked interest rates twice since the summer, with economists expecting two more increases to come in 2022. Those forecasts could change if inflation proves stronger than expected by the central bank.

To boost spending, the government will extend a consumption tax cut on automobiles by six months to June 2022. 

It will also expand tax benefits on research and investment in 65 technology areas deemed as important for national strategy.

The ministry expects:

• Private consumption will rise at a faster pace of 3.8% next year as accumulated household savings support spending
• Export growth will slow to 2% from a relatively high base in 2021 when the value of shipments gained 25.5%; chips, automobiles, new industries will lead next year’s expansion
• Facilities investment will moderate to 3% from 8.3% this year, also affected by a high year-earlier base
• Construction investment will rise 2.7% next year, reversing a 0.9% contraction in 2021

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