Korea Monetary Policy


Central Bank unexpectedly hikes policy rate

At the monetary policy meeting held on 10 June, the Bank of Korea (BoK) raised the BoK Base Rate by 25 basis points, from 3.00% to 3.25%, in a decision which once again defied market analysts' expectations. With the move, the Central Bank resumed the tightening cycle that began in July 2010, after holding rates steady for two consecutive meetings. The BoK has raised the policy rate five times in the last ten months, pushing the policy rate to its highest level since November 2008. In May, annual headline inflation inched down to 4.1% from 4.2% in April, marking a fifth consecutive month that inflation has sat above the BoK 3.0% 1.0 percentage point tolerance range. In addition, core inflation, which excludes volatile items as fresh food and energy, is now at its highest level in more than 18 months as, according to the accompanying statement to the BoK's decision, ?the effects of the recent rises in price of oil and farm products? are passed through to prices of processed foods and services. The BoK believes that inflationary pressures will remain in place going forward, thus providing a case for the tightening move. Market analysts believe that the BoK will continue raising rates in the coming months as the statement claimed that monetary policy will put a ?greater emphasis? on ensuring price stability.

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