Lee Hyoung-il, deputy prime minister and minister of finance and economy and the economic chief of the second Lee Jae-myung Cabinet, met with Bank of Korea Governor Shin Hyun-song, the head of monetary policy, on the 28th. Lee, who visited the central bank just six days after taking office, said he had "wanted to meet as soon as possible" and that he wanted "to firmly establish a system for preemptively responding to risk factors across the economy." Shin stressed that "cooperation and communication between the government and the Bank of Korea are more important than ever," adding that the two sides "need to share their assessment of economic conditions and strengthen the complementarity between policies."
Even as macroeconomic indicators hold up, South Korea's economy faces serious financial instability and household strain caused by high inflation and high interest rates. According to the Korea Real Estate Board, the average vacancy rate for general commercial properties nationwide stood at 13.36% in the second quarter, the highest since 2021. That means the foundations supporting small business owners are collapsing on the front line of the economy for low- and middle-income households. Corporate conditions are also shaky. The business survey index (BSI) outlook for October, compiled by the Federation of Korean Industries among the top 600 companies by revenue, turned negative in the span of a month. Six out of 10 manufacturers are pessimistic about meeting their operating profit targets this year.
With global monetary tightening, a deteriorating situation in the Middle East and other external uncertainties shaking household finances and threatening the real economy, it is a positive step that the two officials leading fiscal and monetary policy have affirmed their commitment to working together. But the meeting of the economy's two top policymakers must not end as a formal courtesy call. The policy discord between the government and the monetary authorities is already at a worrying level. While the central bank is raising rates to rein in inflation, the government is accelerating expansionary spending based on excess tax revenue from semiconductors. If the government loosens fiscal policy and stokes prices, the Bank of Korea's tightening will inevitably drag on. Household conditions would grow more difficult, and the possibility that fiscal soundness itself would weaken cannot be ruled out.
Stabilizing prices and financial markets while achieving sustained economic growth requires a finely calibrated policy mix in which fiscal and monetary policy work in concert. This is a critical juncture: one misstep could freeze consumption and investment and set off the detonator of bad debt in the economy. The central bank must prevent shocks to the real economy through cautious monetary policy, and the government must pace its fiscal spending so as not to stoke aggregate demand. Together they must find the optimal policy combination.
