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Bank of Korea, finance ministry to clash over post-pandemic policy

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From left are Bank of Korea Governor Lee Ju-yeol and Finance Minister Hong Nam-ki. Yonhap
From left are Bank of Korea Governor Lee Ju-yeol and Finance Minister Hong Nam-ki. Yonhap

By Lee Min-hyung

The Bank of Korea (BOK) and the Ministry of Economy and Finance are set to clash over a policy direction to handle potential "post-pandemic" economic uncertainty here.

The central bank has been hinting at the possibility of raising its key interest rate once or twice possibly in the latter half of the year, citing evident momentum for an economic recovery in tandem with the country's vaccination drive.

The diminishing signs of monetary easing, however, are not in line with the finance ministry's planned extra budget. The ministry expects its supplementary spending to help put the economy on a more stable track for a complete recovery, as some social groups ― such as small business owners ― still remain vulnerable to virus-related uncertainties.

The 30 trillion won ($26.37 billion) extra budget will be spent on vulnerable groups as well as regular citizens to accelerate domestic consumption.

The ruling party and the finance ministry plan to provide the emergency relief funding sometime around the Chuseok holiday which falls in late September.

But the timeline raises concerns, as the central bank is also expected to start increasing the benchmark rate as early as October ― a general consensus is that the BOK will institute a 0.25 percent rise no later than the end of November.

Remarks from the heads of the two financial authorities also show their different views on future economic policies.

Finance Minister Hong Nam-ki reiterated his strong determination to achieve a "complete economic recovery" this year through extra budget spending.

"We are going to carry out all possible policy-wise measures for a complete economic recovery which includes the normalization of employment rates," Hong said early this month. "The ministry will keep a lookout for an imbalanced or K-shaped recovery, and focus on achieving a full-fledged recovery."

But this is not in line with central bank thinking. Last week, BOK Governor Lee Ju-yeol reiterated his stance over monetary policy direction, underlining the need to "normalize monetary easing" in the near future.

"The BOK should halt its monetary easing at an appropriate time under the assumption that the economy continues its solid momentum for recovery," Lee said.

Given Lee had not mentioned a rate hike since the BOK cut its key rate to a record low 0.5 percent in May 2020, the market interpreted his latest message as a strong signal for an earlier-than-expected increase.

Korea Capital Market Institute economist Kang Hyun-ju said the different policy direction from the two authorities is understandable under the lingering economic uncertainties here.

"The BOK focuses more on stabilizing the financial market, while the finance ministry places an emphasis on helping virus-hit groups recover from the pandemic," he said.

"The two authorities shared a similar view in their policy last year when the economy was suffering from the pandemic aftershock, but this is not the case this year. Each authority has its own policy mission. As the economy is apparently showing signs of a rebound, their difference in viewpoint is understandable."
Lee Min-hyung

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