Bank of Korea, will it curb prices or prevent a recession?

- Bank of Korea, will it curb prices or prevent a recession? -

Feb. 21, 2024 (Reuters) - Minutes from the U.S. Fed's January Federal Open Market Committee (FOMC) meeting are again dragging down the top three U.S. stock markets.

In other words, Fed officials will not rush to cut interest rates because of higher-than-expected U.S. economic indicators.

In other words, the FOMC says there will be "no rate cut" until it has "greater confidence" that inflation is slowing.

Therefore, UBS (Investment Banking Company) analyzes that the Fed will not cut interest rates until June 2024.

In other words, the problem is that if the U.S. labor force and inflation indicators continue to heat up, the U.S. Fed will have no choice but to hold off on interest rate cuts indefinitely.

In other words, no one knows when the Fed will cut interest rates.

In other words, uncertainty continues.

In this case, a recession cannot be prevented due to long-term high interest rates.

So central banks will be wondering, "Are we going to keep prices high? Or are we going to stop the recession?"

I believe that the "inflation target of 2.0%" that the Fed or the Bank of Korea is currently pursuing is virtually impossible.

Because, there's something that all economists are missing right now.

It's not "high prices, high interest rates," it's "high wages."

In other words, the high-wage part hidden in high prices cannot be solved no matter how good the central banks of each country use.

For example, a high-quality apple now costs more than "W10,000" in Korea.

Then why did the price of apples go up like this?

If you listen to the apple farmer's story, he can't do it because the labor cost has risen.

Therefore, I believe that the "stable inflation rate" of the Fed or the Bank of Korea is appropriate in the "3% range," not "2.0%.

Because "you can't bring down the CPI (Consumer Price Index) to 2% without bringing down the economy."

Therefore, I argue that the Bank of Korea should cut interest rates and use stimulus measures when the CPI enters the "3% range."

Let's take an example.

According to the Bank of Korea's most recent data, the nation's CPI for January 2024 was "+2.8 percent" year-on-year and "+0.4 percent" month-on-month.

In addition, the PPI (Producer Price Index) is also "+1.3%" compared to the same month last year and "+0.5%" compared to the previous month.

In other words, Korea's CPI and PPI continue to increase.

In particular, the increasing trend of PPI in January could push CPI up in the next 2-3 months.

Therefore, in my view, the Bank of Korea should cut the benchmark interest rate by "0.25%" at the next Monetary Policy Committee, as much as possible, to prevent a deepening recession in the Republic of Korea.

This is because Korea already has a CPI close to the 3% range, and the base rate has a short-term interest rate, so you can respond with flexibility.