Bank of Korea Holds Policy Steady

July 14, 2011

South Korea’s base rRate, which underwent five 25-basis point hikes previously between July 2010 and June 2011, was left at 3.25% this month.   A new statement from officials expresses optimism about Korean growth prospects, concern about risks to inflation and determination to pursue price stability above other goals.  June CPI inflation of 4.4% was above both May’s 4.1% on-year pace and the target range of 3-4%, and core also accelerated last month, reaching 3.7%.  GDP growth is running slightly above 4%.

The Committee 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.

Korean monetary officials have been cautious, nonetheless, avoiding a rate hike this year at meetings in February, April, May and the current month.  They  “recognize the possibility of such factors as the sovereign debt problems in Europe and the heightened volatility of economic activity in major countries posing downside risks to the global economy.”  Another development to watch is the won, which is trading about 15% higher against the dollar than it was a year ago.

The policy pause in July was anticipated by analysts.  At 3.25%, the base rate is 125 basis points above its February 2009 – July 2010 low but two percentage points below its last cyclical high of 5.25% from August 2008 to October 2008.  As in many economies, Korea’s shift to an ultra-accommodative stance during the Great Recession occurred in a hurry.  Two cuts in October 2008 totaled 100 basis points and was followed by a reduction of 175 bps in December and a final 50-bp cut in February 2009.

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



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