Bank of Korea Fails to Raise Key Interest Rate

October 14, 2010

For a third straight monthly meeting, the seven-day repo rate was left at 2.25%.  This decision was made in the face of an increasing risk factor from the volatility of exchange rates.  That factor is getting greater priority than rising CPI inflation, which has advanced to a 12-month pace of 3.6% compared to 2.2% a year earlier and 2.6% earlier this summer.  Officials attribute the uptick of inflation to “a sudden rise in farm product prices” and warn of future demand-side upward pressure.  Annualized quarter-on-quarter growth slowed in South Korea to 5.8% in 2Q from almost 9% in 1Q, and industrial production is running 17% higher than a year ago.  But won appreciation against the dollar despite heavy Korean intervention has Seoul officials in a cautious mood.  Only one increase of the repo rate has been implemented so far, an adjustment of 25 basis points in July.  The rate had been previously at 2.0% since February 2009.  It was cut during Korea’s recession from a peak of 5.25% by 100 bps in August 2008, 175 bps in December 2008 and 50 bps in February 2009.

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



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