Bank of Korea Tightens for a Second Time

November 16, 2010

Korea’s seven-day repo rate has been raised from 2.25% to 2.5%, a move that analysts predicted.  An initial tightening on July 9 had also been by 25 basis points, but the ensuing policy meetings in August, September and October had left the key interest rate steady partly because of concern about a rising won.  A statement released by officials after their decision expects domestic business activity to maintain a decent pace despite external risks.  Monetary officials also anticipate upward pressures on inflation and observes that long-term interest rates and equity prices have trended higher.  South Korean GDP advanced 3.0% annualized last quarter and by 4.5% from 3Q09.  Consumer prices rose 4.1% in the year to October.  In three steps implemented in August and December of 2008 and February of 2009, the benchmark interest rate was lowered 325 basis points from 5.25% to 2.0%. 

South Korea, the region’s fourth largest economy, is one several central banks in Asia to have begun raising rates.  Benchmark interest rates have been increased thus far by 200 basis points in India, 175 bps in Australia, 150 bps in Israel, 100 bps each in Pakistan and Vietnam, and 75 bps in Malaysia.  Central banks in Thailand and New Zealand, like the Bank of Korea, have done 50 basis points of tightening so far.  China’s key rate was lifted 25 bps to complement several other measures to cool aggregate demand.  Singapore’s central bank signaled a trade-weighted revaluation of its currency, which is how it snugs monetary policy.  Central banks in Indonesia, Hong Kong, the Philippines and Turkey have not yet implemented their first normalizing moves.

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



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