The Korea Herald


S. Korea needs to tread carefully with monetary policy in post-virus era: experts

Economists worry that bold monetary policy, quantitative easing, contact-free business trend could have unintended effects

By Jung Min-kyung

Published : Aug. 19, 2020 - 15:19

    • Link copied

Bank of Korea Gov. Lee Ju-yeol holds a meeting in Seoul on May 28, when the seven-member policymaking board voted to cut the key rate by a quarter-percentage point to a new record low of 0.5 percent. (Bank of Korea) Bank of Korea Gov. Lee Ju-yeol holds a meeting in Seoul on May 28, when the seven-member policymaking board voted to cut the key rate by a quarter-percentage point to a new record low of 0.5 percent. (Bank of Korea)

To quell the market volatility that the coronavirus has caused, South Korea’s monetary policymakers took a number of steps -- some expected and others unprecedented -- to funnel liquidity and cushion the effects of the pandemic. 

But while the market may have dodged a bullet, experts warn that Korea needs to be cautious about monetary policy from now on, considering the potential adverse effects of quantitative easing.

“The benefits of the use of QE in other countries in the past remains controversial,” Waqas Adenwala at the Economist Intelligence Unit told The Korea Herald in a recent email interview.

“However, with current central bank benchmark interest rates at record low, the chances have further increased that the Bank of Korea may introduce unconventional monetary policy measures,” he added. 

The nation’s central bank, as part of its quantitative easing strategy, operated a repo program from April to July, offering to purchase an unlimited amount of bonds from financial firms here. It was an unprecedented move. 

Quantitative easing, which basically involves central banks purchasing government bonds to increase the domestic money supply, is considered unconventional and often controversial. It can increase excess reserves and liabilities for the economy and the central bank, experts say. 

“The gains from such a move can only be limited to the short term as experience from Japan and the EU shows. Adopting QE also raises the risk of leaving less room for the central bank to respond to shocks in the future (and could lead) to a distortion in the government’s bond market,” Adenwala said. 

Quantitative easing could take a toll on the nation’s fiscal health if abused and should only be a temporary measure, said Kang Sung-jin, a professor of economics at Korea University.

“The government has managed to allocate some 60 trillion won ($50.79 billion) via three extra budgets this year, but this places pressure on future generations,” Kang said. 

“The central bank’s excessive money supply and rate cut could even lead to a drop in the value of the won and to inflation.”

The BOK has also slashed the benchmark interest rate to a record low of 0.5 percent to cope with the economic fallout from COVID-19, but Korea needs to keep in mind that fiscal policy must be in line with monetary policy, another expert said. 

“While the central bank is likely to keep interest rates low for an extended period, in the near term fiscal policy will be more important to continue to support elements of the economy that face difficulties in recovery,” Steve Cochrane, chief APAC economist at Moody’s Analytics, said. 

“Travel and tourism are examples sectors that may take the longest to recover and may require additional support by the government. Further, unemployed individuals will need extended assistance … policies to help the banking sector deal with problems of debt repayment will help to keep the economy move on the right track as the entire global economy begins to recover,” he added. 

The highs and lows of ‘untact’

The “untact,” or contactless, movement fueled by COVID-19 has ramped up the shift toward a hyperconnected society in which people rely more and more on the internet and mobile gadgets.

“The greatest advantage of a contactless society would come from a complete networking of the entire geography of Korea. Everyone would have equal and speedy access to high-quality online-based services and products,” Cochrane said. 

In a recent survey by the online job portal Saramin, about 71.6 percent of 3,280 Korean adults said they were increasingly participating in non-face-to-face forms of consumption, including online shopping, remote mobile orders and the use of internet-only bank or stock accounts.

“Every industry will face an increased need to be present on the Internet for production, marketing and sales. There will be a need to broadly increase productivity in every industry to be globally competitive,” Cochrane said.

Various business sectors in Korea have increasingly embraced the contactless consumption trend. The country’s major retail firms, for example, are expanding online sales channels to attract customers amid the prolonged need for social distancing. Major commercial banks are closing brick-and-mortar branches, doubling down on digital finance and launching IT-related teams. 

To achieve a soft landing for the new contact-free economy, there is a need for government efforts to make up for the social blind spots of the industrial shift, experts say. 

“(The rise of contactless business) will also raise questions over its impact on employment, especially in the retail sector, as it is likely to lead to disruption like unemployment in the labor market in the short run,” said Adenwala. 

For instance, employees at Lotte Shopping are faced with restructuring as the company has decided to shut down nearly 30 percent of its retail stores across the country to focus on online business, industry sources said. 

“If South Korea can continue toward this goal of ‘untact’ growth, it will help to elevate the entire economy. The other piece of this is to make sure that use of technology is included in all levels of education, across all economic sectors, to make sure no one in the labor market, and no sectors, are left behind,” Cochrane said.

By Jung Min-kyung and Choi Jae-hee (">