BOK to proceed with rate increases as inflation likely run at 5 to 6% for sometime

The South Korean central bank will have to continue with rate increases as inflation is expected to run at 5 to 6 percent for a “considerable period” and will take prompt stabilization actions when finding foreign exchange market volatility excessive.

In its report submitted during the National Assembly audit on Friday, the Bank of Korea (BOK) reiterated its rationale for keeping up rate increases to contain inflationary expectations and further rise in prices.

“It is important to contain spread of inflation expectations and prevent current high inflation getting entrenched in the society,” it said.

The BOK has hiked the base rate seven times since August last year to yank the rate at 2.5 percent from the record low of 0.5 percent. In July this year, it delivered the first-ever hike in 50 basis points.

The inflation will be running at 5-6 percent for awhile, and the strengthening in the U.S. dollar will add more pressure, the bank projected.

“The rate increase scope, timing, and process will be decided upon study on the external impact on domestic prices, growth, and markets,” it said.

The BOK is expected to deliver another hike – possibly in 50 basis points - on Oct. 12.

As for growing volatility in the forex market, the central bank promised monitoring efforts and timely actions to stabilize the market.

The U.S. dollar started soaring against the Korean won on expectations for faster tightening in the U.S. and Europe since mid-August, and volatility expanded due to concerns about fiscal deficits and further economic slump.

The BOK is discussing with the U.S. Federal Reserve for a currency swap if deemed necessary.

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