|South Korea’s money supply hit a four-month high in August after a policy rate cut in July / Photo by jipen via 123rf|
South Korea’s money supply hit a four-month high in August after a policy rate cut in July. This is according to South Korean newspaper company Yonhap News Agency, citing the country’s central bank data. The central bank cut interest rates by 25 basis points to 1.50 percent in July. When a central bank cuts interest rates to maintain a certain level of stability in a country’s financial system, consumers will earn less interest on their bank savings.
The country’s broad money
The Bank of Korea has also reported that the country’s M2 or broad money, which is the method of calculating the money supply of a country, reached 2,832.6 or US$2.39 trillion at the end of August. This indicates a 0.9 percent increase from a month earlier. Compared to August 2018, there was only a 6.8 percent increase in the country’s M2.
In measuring M2, it counts the currency that is in circulation, deposits with less than two years of maturity, stock investments, and bank debentures. It is the topmost economic indicator that authorities are closely monitoring. The report also showed that the money supply of South Korea continued to increase since October last year.
Increase in the money supply
An increase in the money supply often leads to a fall in the interest rates, which consequently means an increase in economic activity, investment, and even the possibility of inflation. The link between inflation and money supply happens when the money supply grows faster than the country’s real gross domestic product. Nevertheless, such link can be weak because the velocity of money circulation or the number of times that cash changes hands or ownership are volatile, explains economic education platform Economics Help.
|In February, South Korea’s money supply growth hit the lowest in eight months / Photo by Thanthima Limsakul via 123rf|
Some of the ways that countries use to increase their money supply include printing more money, reducing the interest rates, quantitative easing, expansionary fiscal policy, central bank paying investors holding bonds or buying government securities, and reducing the serve ration for lending.
In February, South Korea’s money supply growth hit the lowest in eight months. It happened because the demand for household debts—the combined debt of all people in a household –weakened.
Policy interest rate
In a separate report by daily Business World, the Central Bank of Korea is likely to cut its policy rate again this week to support its economic growth. In a poll, 30 out of 31 analysts expected that BoK will cut its interest rate this week by 25 basis points. Seventeen of the respondents also saw that a cut is coming by the third quarter next year. Korean securities brokerage company Shinyoung Securities’ economist Cho Yong-gu said that although the cut-rate will only have a limited effect, it can add a “slight support” to the country’s economy. Meanwhile, an economic research consultancy founded by the Wall Street Journal Pantheon Macroeconomics’ chief Asia economist Freya Beamish opined that the worst of the economic slowdown in South Korea was already over, which means that the central bank should already have some “room to pause.”
The BoK started the easy cycle in July but it put the interest rate on hold during its last meeting in August. The daily added that global investment banks have likewise downgraded their forecast on the economic growth of South Korea this 2019. Some investment banks expect the country to slow below 2 percent from 2.7 percent last year.
The decline in the country’s exports and drop in consumer prices are the factors that add up to the case for the Bank of Korea to cut its key rates.
Broad money: OED Data
Based on the data provided by The Organization for Economic Co-operation and Development, which was founded to stimulate world trade and economic progress and comprises 36 member countries, Korea’s broad money in January 2012 was at 76.4 measured based on a seasonally adjusted index of 2015=100. January 2013 at 82.6, January 2014 at 88.0, January 2015 at 95.4, January 2016 at 103.9, and January 2017 at 111.8.
The 2015=100 is an index with 2015 as the reference year. It is one of the measures for the consumer price index and not a specific currency. The other measures the OECD used were the national index with the national reference period, the annual change, the previous period change, and the contribution to annual inflation.
In 2018 and 2019, the broad money (M3) was detailed as follows:
Other countries listed in the OECD are Australia (119.3 M3 in August 2019), Brazil (136.2 M3 in December 2018), Canada (130.9 M3 in July 2019), People’s Republic of China (139.1 M3 in December 2018), Denmark (100.6 M3 in December 2018), South Africa (131.3 M3 in August 2019), and the United States (124.3 M3 in August 2019). The dates differ as the list highlighted the most updated index available for each country.