South Korea’s money supply records record gain

South Korea’s money supply gained a record amount of foreign currency and other liquid instruments year on year in December, central bank data showed on Wednesday, setting off inflation alarm bells.

The country’s M2 stood at 3,191.3 trillion won ($2.9 trillion) at the end of December, gaining 260.9 trillion won year on year, according to preliminary data compiled by the Bank of Korea. In terms of percentiles, M2 increased by 9.8% year-on-year and 0.4% month-on-month. M2 is a calculation of money supply that includes cash, deposit checks and easily convertible quasi-currencies.

The sharp increase in the money supply often results in a sharp increase in liquidity in the market in times of financial crisis. In 2008, due to heightened risks from the global financial crisis, M2 increased by 14.2% year-on-year, while the figure gained 10.3% the following year.

The strong momentum seen in the increase in money supply in December was due to large loans to households and businesses extended by banks here, the BOK said.

Household and corporate lending by Korean banks has grown at a rapid pace since the outbreak of the COVID-19 pandemic here early last year. Outstanding bank loans to local households rose by 100.5 trillion won year on year to reach 988.8 trillion won at the end of December, according to earlier data from the BOK. Outstanding business loans, meanwhile, gained 107.4 trillion won over the same period to reach 976.4 trillion won, posting the largest one-year gains since 2009.

Key factors were the BOK’s decision to cut its benchmark interest rate to a record low 0.5% in May last year and the government’s ongoing loan deferral program for local businesses. financially affected by the pandemic. The government on Tuesday asked the major banking groups to extend the program – which was due to end at the end of March – for another six months.

The snowballing momentum in M2 is fueling concerns about inflation, which could be a problem if the money supply grows faster than economic output under “normal economic circumstances”.

The fact that global demand is returning to normal intensifies these worries, but local experts are leaning towards projections of “disinflation” or “reflation” for Asia’s fourth-largest economy. Disinflation is basically a slowing of the rate of increase in the general price level of goods and services in a country’s economy, while ‘reflation’ is the first phase of economic recovery after a period of contraction.

“In 2020 lackluster demand, lower global oil prices and government welfare policies drove prices down, but in 2021 it is likely to move in the opposite direction,” the governor said. of the BOK Lee Ju-yeol in December.

“It would be deflation if prices for commodities and services fall, but it should increase in 2021, but not to the point where the economy has to worry about a spike in inflation,” he said. he adds.

By Jung Min-kyung ([email protected])

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