Bank of Korea More Guarded

August 11, 2011

As at other central banks, Bank of Korea monetary authorities are not able to normalize interest rates as quickly as domestic economic conditions would seem to warrant, and the reason is external risks.  U.S. and European growth prospects have worsened, and South Korean financial markets have not been immune from the turbulence in other countries.  Two Korean interest rate hikes were implemented in 2H10, and those moves were followed by three more during the first half of this year.  But no additional tightening occurred in either July or this month.  A statement on the Bank of Korea’s web site posted today predicts that high total and core inflation trends are likely to persist for now and notes that the won has lost ground this month against the dollar.  On-year CPI inflation of 4.7% compares unfavorably to 4.1% in May and a 4.0% target ceiling. While asserting the primacy of preserving price stability, the communique warns of “the possibility of such factors as the potential for continuing economic slowdown in major countries, the spread of sovereign debt problems in Europe, and international financial market unrest posing downside risks to the global economy.”  At the July and August meetings, those risks tipped the balance of opinion, and officials opted for caution and paused the process of rate normalization.

The seven-day repo rate remains at 3.25%.  The cyclical low of 2.0% was maintained from February 2009 until July 2010.  The pre-recessionary cyclical high of 5.25% was 200 basis points above the current rate level.

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



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