SEOUL, May 13 (AJP) - South Korea’s liquidity expanded sharply in March, with much of the abundance funneling toward the red-hot asset market rather than helping to bolster weakening economic fundamentals and creating a headache for monetary authorities battling looming imported energy-triggered inflation and a stubbornly weak currency.
The M2 money supply reached 4,132.1 trillion won ($2.76 trillion) in March, up 5.6 percent from a year earlier, according to the Bank of Korea on Wednesday.
M2 includes cash, demand deposits and other highly liquid financial instruments. Under the BOK’s previous calculation standard, the figure would have stood at 4,625.1 trillion won, marking a 9.3 percent on-year increase.
By either measure, liquidity growth is accelerating noticeably.
The last time M2 growth exceeded 9 percent under the old standard was in April 2022, when it reached 9.4 percent, at a time when markets were still awash with liquidity injected during the Covid-19 pandemic. That period later prompted aggressive interest rate hikes by the U.S. Federal Reserve and other major central banks to absorb excess liquidity.
Even under the revised standard introduced late last year — after criticism that the central bank’s loose policy stance had contributed to the won’s weakness against major currencies — Korea’s liquidity growth still more than doubled Japan’s roughly 2 percent pace and outpaced the eurozone’s 3.2 percent expansion during the same period.
The surge comes amid growing rationale for monetary tightening.
New Bank of Korea Governor Shin Hyun-song, Senior Deputy Governor Ryoo Sang-dai and recently retired monetary board member Shin Sung-hwan have all recently mentioned the possibility of an interest rate hike.
The won on Wednesday hovered close to the psychologically sensitive 1,500-per-dollar mark, a level previously seen mainly during periods of financial crisis.
Consumer prices rose 2.6 percent in April even as the impact of disruptions around the Strait of Hormuz has yet to fully reach Korean shores through higher energy costs.
The government, meanwhile, continues to lean toward fiscal stimulus despite mounting concerns over debt and excess liquidity in an effort to pre-empt stagnationary risks.
During a Cabinet meeting Tuesday, President Lee Jae Myung criticized calls for tightening as “populist” and signaled fiscal expansion in the second half and next year’s budget planning.
Lee argued that the livelihood recovery support payments distributed last year generated roughly 430,000 won in additional consumption for every 1 million won provided.
The government is currently preparing another round of high oil-price relief payments ranging from 100,000 won to 600,000 won per person depending on income level and region. The total package is expected to amount to 6.1 trillion won.
The real question lies in the effectiveness of the stimulus measures.
The money multiplier — calculated by dividing the new M2 measure by the monetary base — stood at 13.43 in March, continuing a steady decline from its peak of 14.5 in November 2023.
The indicator measures how actively liquidity is being used across consumption, investment, lending and asset purchases. A lower multiplier suggests money is not circulating efficiently despite the growing supply.
“The increase in money supply only becomes meaningful when consumption and investment expand, but currently only stocks and real estate are rising,” said Ahn Dong-hyun, an economics professor at Seoul National University.
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