An analysis said the supplementary budget to respond to the Middle East crisis is likely to have a limited possibility of stoking inflation.
On the 15th, the Bank of Korea (BOK) stated accordingly in materials submitted to lawmaker Cha Kyu-geun of the Rebuilding Korea Party.
According to the Bank of Korea (BOK), a supplementary budget can generally boost demand through expanded fiscal expenditure and act as upward pressure on prices, but the actual impact can vary depending on its size, timing of execution, and program composition. In particular, the BOK explained that, at present, with the fallout from the Middle East war, cost-side factors such as rising international oil prices are being cited as having a greater impact on inflation.
The Bank of Korea (BOK) cited the economic situation as the reason it expects the price impact of the supplementary budget to be limited. With real gross domestic product (GDP) below potential GDP—an "negative GDP gap" state—even if fiscal expenditure increases, it is unlikely that consumption and investment will expand rapidly and push up prices.
It was also noted that recent economic trends are appearing unevenly between the information technology (IT) and non-IT institutional sectors. Bank of Korea (BOK) Governor Rhee Chang-yong said in January that while he projected this year's growth at 1.8%, excluding the semiconductor and other IT institutional sectors, growth could be around 1.4%. The BOK later raised this year's growth forecast to 2.0%, but that reflects strength in the IT institutional sector, such as a recovery in semiconductor exports.
The Bank of Korea (BOK) also saw the growth effect of a supplementary budget as varying depending on program details and the speed of execution. However, past cases show there was some effect in raising the growth rate. The BOK previously estimated that the first supplementary budget of about 13.8 trillion won last year and the second supplementary budget of about 16.2 trillion won would each have the effect of raising the economic growth rate by about 0.1 percentage point.
The Bank of Korea (BOK) said that if the situation in the Middle East deteriorates rapidly, negative effects could appear on domestic growth and prices, and that the size of the economic shock depends on whether the crisis is prolonged.