Inflation top priority in Korean monetary policy as BOK sees annual rate around 5%

[Photo by Park Hyung-ki]

Bank of Korea (BOK) Governor Rhee Chang-yong on Wednesday reconfirmed interest rates will go up until inflation is tamed upon judgment that the annual rate could exceed 4.5 percent estimated last month and finish the year above 5 percent.

“The monetary policy must be flexible and dependent on data on inflation, economic performance, financial market, and foreign exchange conditions. But at times of persistent rise in consumer prices, monetary policy must be focused on prices until the rapid growth trend changes,” the governor said in a press conference after price stability review.

He suggested strong inflation trend could lengthen. “The impact from external supply shock could be prolonged. High oil prices cannot be easily resolved and international food prices likewise,” he said.

“If inflationary expectations are not contained amid the possibility of persistence in inflationary pressure, high inflation condition could become fixated,” he warned.

The expected inflation rate for short term has exceeded 3 percent, above the mid-to long-term target of 2 percent, and the long-term expected rate has also neared 2 percent, he added.

A vicious cycle of expectations feeding inflation could be activated, he warned.

The Korean monetary policy board has four rate-setting sessions left in the year including the next one in July. BOK deputy governor has already suggested a hike beyond the usual 25 basis point following the U.S. Federal Reserve’s 75-basis-point raise earlier this month.

Although Korea has initiated rate lift-off earlier in August last year, its base rate at 1.75 percent is more or less on par with U.S. rates following the latest series of steep raises by the Federal Reserve.

[Photo by Lee Chung-woo]

In a separate report, the BOK revised up 4.5 percent annual inflation estimated only last month and projected the annual gain to top 4.7 percent of 2008, the year of the global financial crisis outbreak.

“Inflation is expected to continue its upward trend hovering sharply above 5 percent for a while given high supply and demand inflationary pressure,” it said, warning the headline inflation in June would exceed 5.4 percent gain in May.

It projected the gain in consumer price index (CPI) for April-June period to exceed 5 percent for the first time since 5.5 percent in the third quarter of 2008. Price rise could be steeper in the second half than the first to imply annual rate above 5 percent and highest since 2008.

During past period of high inflation, prices were led by a rise in demand for raw materials amid expansion in China’s investments in manufacturing, real estate, and infrastructure sectors.

The latest surge in prices has been triggered by supply bottleneck issues affected by Covid-19, Russia’s invasion of Ukraine, and China’s lockdown, as well as environmentally-friendly regulations leading to sluggish facility investment, the BOK said.

International food prices have been hitting new historic high amid the protracted war between Russia and Ukraine, both global breadbasket for fertilizers, animal feed, and human food.

[ㄏ Maeil Business Newspaper & mk.co.kr, All rights reserved]