Bank of Korea’s Fourth Rate Hike Was Anticipated

March 10, 2011

Analysts had expected a base rate increase to 3.0% from 2.75% in February.  It didn’t happen then but was done today.  Three earlier tightenings of 25 basis points apiece were implemented in July 2010, November, and January 2011.  From a pre-recession peak of 5.25%, such was slashed by 325 basis points in three steps of 100 bps in August 2008, 175 bps in December 2008 and 50 bps in February 2009. 

South Korea is now experiencing a robust economic recovery with strength coming from both domestic demand and exports.  Inflation has unfortunately been pulled up to a 27-month high of 4.5% by demand-pull pressures and rising prices for oil and food.  A central bank statement released today cites several external risks like mideast turmoil, rising oil prices and Europe’s sovereign debt crisis but concludes that the global and Korean economic recoveries will persevere at a decent pace.  Inflation is seen remaining for now above the 2-4% target.  Core inflation accelerated a half percentage point last month to an 18-month high of 3.1%.  The statement also notes the elevation of expected inflation and acceleration of property price inflation.  More tightenings would seem probable.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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