Bank of Korea Fails to Tighten Policy

May 13, 2011

The Monetary Policy Committee did not hike South Korea’s Bank Rate by 25 basis points as expected, so such instead remains at 3.0% following increases of 25 basis points each last July, November, January, and March.  During the Great Recession, three rate cuts were implemented of 100 basis points in August 2008, 175 bps in December and 50 bps in February 2009.  One possible reason for not tightening a fifth time today is that CPI and PPI inflation receded to 4.2% and 6.8% in April from 4.7% and 7.3% in March.  However, inflation still exceeds the central bank’s 3-4% target range, and officials warned of the “possibility of the high rising price trend persisting in the coming months, driven largely by increased demand pressures from the economic upswing, by instability of international oil prices, and by elevated inflation expectations.”  Upward pressure on the won may have been decisive in deterring officials from raising interest rates at this time, but it’s only a matter of time before such is done, given that inflation exceeds the 3.0% rate level as well as the CPI target.

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



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