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By Yoon Ja-young
The central bank is unlikely to hike its key interest rate in the coming months due to a worsening job crisis amid rising inflationary pressure.
The Bank of Korea (BOK) had signaled that it would raise the key rate either in August or September, with the interest rate gap between Korea and the United States widening.
According to job market data released by Statistics Korea Friday, the number of employed people stood at 27.08 million last month, which is up a mere 5,000 from a year ago.
The number of newly added jobs has been hovering slightly above 100,000 for the past six months, but it declined to below 10,000 in July, marking the worst figure since January 2010.
In contrast, inflationary pressure is building due to soaring prices of vegetables and fruit amid the prolonged summer heat wave
According to the Bank of Korea (BOK) Tuesday, the country's producer price index (PPI), or a measure of business inflation, stood at 104.83 in July, up 0.4 percent from the previous month, the highest in three years and 10 months.
A mixture of the shocking job market figure and rising prices is perplexing the BOK. The central bank has been freezing the key rate following a hike in last November, but some members of the Monetary Policy Board started suggesting a rate hike recently.
Analysts say that it will be difficult for the central bank to raise it.
"A key rate hike is possible only when it is backed up by job market conditions," said Kim Su-jeong, an analyst at Hana Institute of Finance.
"The job indices are expected to improve only as late as in the fourth quarter. Only then will the central bank will have the environment for a hike," she said.
Analysts point out that the poor job market is leading to sluggish consumption and economic recession.
Falling jobs in the manufacturing sector following restructuring at key industries such as automobiles, shipbuilding and steel pulled down the overall figure; coupled with the decrease in the wholesale, retail, restaurant and accommodation sectors, which seem to have been affected by the steep minimum wage hike.
If the central bank raises the key rate, it will decrease liquidity in the market. It can further suppress the economy as corporate facility investment falls.
On top of the worsening job market, economic sentiment is deteriorating with the self-employed suffering from falling profitability.
However, the central bank is likely to face further pressure for a key rate hike since the United States is expected to come with two key rate hikes within this year, including one in September.
The country's key rate has been lower than that of the United States, and the reversed gap will further expand. This means the country may suffer from a capital exodus.
"The central bank will see there is a need to raise the key rate, but a hike can deal a blow to the economy, which is losing vitality in domestic consumption," said Huh Jae-hwan, an equity strategist at Eugene Investment and Securities.
