IMF Recommends South Korea to Maintain Existing Monetary and Fiscal Policies

The International Monetary Fund (IMF) said on September 5 that South Korea should maintain its current, restrictive monetary and fiscal policies in order to return to sustainable finances and address inflation.

"The monetary policy rate should remain above neutral for the time being to address inflation, with the interest rate path remaining data dependent," the IMF said in a statement at the end of its two-week visit.

"Moderate consolidation (of the 2024 government budget) will help limit public debt while also supporting monetary policy in efforts to contain inflation," said Harald Finger, Korea Mission Chief of the IMF.

Instead of undermining economic growth, the prudent fiscal policy is judged to be instrumental in keeping South Korea's economic fundamentals strong in the medium term, Finger said at a press conference. Last month, the South Korean government proposed cutting budget spending by the smallest amount in two decades in order to prioritise fiscal discipline in the face of declining tax revenue due to slower economic growth.

In August, the Bank of Korea held interest rates steady for the fifth time in a row, balancing softer inflation with rising risks to growth.

"We do see a moderate increase in downside risk for Korea's growth, especially in 2024, with China's renewed slowdown," Finger said, citing China's policy measures to mitigate economic slowdown as well as other positive factors such as the resumption of Chinese group tourism.