Seoul, South Korea – The Bank of Korea (BOK) has issued a stark warning about the potential for South Korea to enter a prolonged period of economic stagnation, accompanied by deflation. In its latest report on the operation of the inflation target, the central bank expressed concerns over the country’s long-term growth prospects.

The BOK cautioned that while inflation is expected to remain near the target level of 2% in the near term, a persistent decline in potential growth could push the economy into a low-growth, low-inflation trap. Such a scenario would significantly limit the effectiveness of monetary policy, as low inflation would constrain the central bank’s ability to lower interest rates to stimulate economic activity.

Furthermore, the BOK highlighted the risk of asset price bubbles forming as abundant liquidity is channeled into financial markets in a prolonged period of low interest rates. This could create financial instability and exacerbate economic imbalances.

To address these challenges, the BOK emphasized the need for comprehensive structural reforms to boost the country's growth potential. Citing a recent report by the European Union, the central bank highlighted the importance of increasing investment in technological innovation, reviewing regulations on artificial intelligence, and easing market restrictions to facilitate the entry of new businesses.

“Structural reforms are essential for improving resource allocation efficiency and enhancing South Korea’s growth potential and resilience to shocks,” the BOK stated. “By implementing such reforms, we can prevent the economy from falling into a low-growth, low-inflation trap.”

The BOK’s warning underscores the growing concerns about South Korea’s long-term economic outlook. As the global economy faces increasing uncertainty, policymakers in Seoul will need to carefully consider the implications of these challenges and develop appropriate policy responses.