Bank of Korea Tightens Stance and Releases a Hawkish Statement

June 10, 2011

The Bank of Korea, whose Base Rate was slashed from 5.25% prior to August 2008 to 2.0% six months later, announced its fifth increase of 25 basis points today.  The rate is now at 3.25%, representing a 38.5% reversal of the previous stimulus.  Monetary officials had not raised rates at either of its prior two monthly meetings, and many analysts thought they would skip doing so in June as well.  A statement on the central bank’s web site instead indicates that the priority of securing price stability is being elevated: “Looking ahead, the Committee, while taking overall account of financial and economic conditions both at home and abroad, will conduct monetary policy with a greater emphasis on ensuring that the basis for price stability is firmly anchored while the economy continues its sound growth.”  CPI and PPI inflation slowed in May, but the former at 4.1% remains above the central bank target of 3-4%.  Moreover, core CPI rose to 3.5% in May from 3.2% in April.  Regarding economic growth prospects in South Korea, officials are upbeat: “despite the temporary sluggishness of domestic demand, the economy has maintained its underlying upward trend on the strength of the sustained high growth of exports. Labor market conditions have also remained on a track of improvement, led by the private sector. Going forward, the Committee anticipates that the domestic economy will keep up this underlying trend, even in the presence of external risks.”

The four previous rate hikes were implemented in July 2010, November 2010, January 2011, and March 2011.

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



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