KDI says monetary tightening largely helped slow inflation

By Kim Han-joo

SEOUL, Nov. 11 (Yonhap) -- South Korea's consumer prices recently fell below a monthly target rate of 2 percent, largely due to sound monetary policy, a state-run think tank said Monday.

"The tightening of monetary policy through interest rate hikes appears to have been effective in curbing high inflation since 2022," the Korea Development Institute (KDI) said in an economic assessment report.

Consumer prices, a key gauge of inflation, rose by 1.3 percent year-on-year in October, staying below the 2 percent mark for the second consecutive month, according to data from Statistics Korea. October's figure marked the lowest level since January 2021, when consumer prices increased by 0.9 percent.

The country's central bank, the Bank of Korea, had delivered a series of rate hikes between August 2021 and January 2023, and kept the key rate frozen at 3.5 percent, the highest in about 16 years, before slashing it by a quarter percentage point last month.

The report explores the impact of monetary and fiscal policies on the South Korean economy using a structural restriction model, according to the KDI.

The findings indicated that monetary policy has a more sustained impact on inflation rates compared with fiscal policy.

For example, a 1 percentage point reduction in the base interest rate is estimated to increase the inflation rate by a maximum of 0.2 percentage point after three quarters, with the effect lasting for about two years.

In contrast, if government spending increases by 1 percentage point of the gross domestic product, the inflation rate would rise by a maximum of 0.2 percentage point in the same quarter, with effects lasting for about one year.

The KDI expects the trend of slowing inflation to continue unless unforeseen external shocks arise.

"Since the trend of slowing inflation is expected to persist, it would be advisable to adjust macroeconomic policy accordingly," said Hwang Seong-ju, a KDI researcher and author of the report.

The KDI also stressed that while monetary policy should carefully adjust its tightening stance to prevent inflation from staying below the 2 percent inflation target for an extended period, fiscal policy requires a cautious approach, considering the already expanded level of fiscal expenditure.

khj@yna.co.kr
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