Surprise Decision from the Bank of Korea

September 8, 2010

South Korea’s seven-day repo rate was left at 2.25%.  Even though officials had paused tightening at their previous meeting of August 12 following an initial 25-basis point increase on July 9, most analysts were predicting a second 25-bp hike today.  At 2.25% versus a previous cyclical high of 5.25% prior to August 2008, the key policy interest rate of the Bank of Korea remains far below a semblance of neutrality and normality.  GDP growth has been strong, advancing 6.0% annualized last quarter and by 7.2% between 2Q09 and 2Q10.  Industrial production is running 15+% higher than a year ago.  While CPI inflation is only 2.6% on year, such is likely to creep higher.  Officials have a 2-4% CPI target range over the coming two years.  A statement released by the central bank observes the slowdown of U.S. growth could be one of a few externally originating risk factors for economic growth.  The repo rate had been 2.0% from February 2009 until July 2010.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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