The Bank of Korea assessed that even if a supplementary budget is put together to respond to the Middle East war, it is unlikely to stimulate domestic prices.

On the 15th, in materials submitted to Rep. Cha Gyu-geun of the Homeland Innovation Party, a member of the National Assembly Financial and Economic Planning Committee, the Bank of Korea stated that “the likelihood that a supplementary budget will spur prices through demand-side pressure is relatively low.”

The Bank of Korea noted, “In general, a supplementary budget tends to act as upward pressure on prices by boosting demand, but its impact can differ depending on the size, form, and timing of the package,” adding, “At present, there is concern about the influence of cost-push pressures such as higher oil prices due to the Middle East war.”

As a reason for viewing the price impact of a supplementary budget as limited, the Bank of Korea cited “the fact that the gross domestic product (GDP) gap is negative (-).” Because the economy is weak enough that real GDP falls below potential GDP, even if money is injected immediately, consumption or investment is unlikely to rise sharply and push up prices.

The Bank of Korea also pointed to “the fact that growth is appearing differentially between the information technology (IT) and non-IT sectors, such as semiconductors.” Because the fruits of growth from robust semiconductor exports are not spreading evenly to other sectors, even if a supplementary budget is compiled, its effect on prices would be limited. Bank of Korea Governor Lee Chang-yong said in January that he expected this year's growth rate to be 1.8%, adding that excluding the IT sector it would be only 1.4%.

It said it is still difficult to estimate the effect a supplementary budget would have on economic growth. The Bank of Korea said, “The impact of a supplementary budget on the GDP growth rate varies greatly depending on the fields, size, and timing of execution of the detailed projects included.” However, it noted that last year’s first supplementary budget of 13.8 trillion won and second supplementary budget of 16.2 trillion won each likely lifted that year’s growth rate by 0.1 percentage point.

It took a neutral stance on the necessity of compiling a supplementary budget. The Bank of Korea assessed, “Given that this year’s growth rate is rising significantly from last year, the need for a supplementary budget to respond to the business cycle has decreased somewhat compared with last year,” while also stating, “It is also true that, as the situation in the Middle East has deteriorated rapidly of late, there is concern about negative effects on domestic growth and prices.”

The Bank of Korea said, “The economic aftermath of this shock will ultimately be heavily influenced by whether the current situation is prolonged,” and added, “Whether to actually compile a supplementary budget will be decided by the government and the National Assembly within legal requirements, taking into comprehensive account how the Middle East situation unfolds and other changing conditions.”

Rep. Cha said, “A supplementary budget is not a hasty stopgap but a support measure for export companies, transport operators, and small business owners that have suffered damage from the Middle East crisis,” and added, “The government should promptly inform the public of the specific targets, methods, and scale of support.”