Bank of Korea Gov. Kim Choong-soo said Thursday that Korea might need to brace for rising inflationary pressure toward the latter half of this year as consumer prices were expected to climb further following the rainy season.
The BOK chief added that the financial markets would continue to face periodic volatility until the U.S. Federal Reserve completely unwound its quantitative easing as its job market improved in 2014.
Kim’s cautionary note came after the central bank’s monetary policy committee unanimously kept its key base rate unchanged at 2.50 percent for August, saying Korea was on the path of “moderate recovery.”
The rate freeze is mostly attributable to brisk exports of IT products, revived facility investment and a positive outlook for the U.S. economy, one of Korea’s biggest trading partners.
Kim did not comment directly on the possibility of raising its benchmark interest rate next month as a means to preemptively tame rising inflation.
However, the governor pointed out that prices of agricultural products in Korea generally started to increase in July with the onset of the monsoon season.
He said the bank would have to closely watch this and next month over consumer prices, whose rate of increase may appear higher in the second half of this year compared to a year ago due to the base effect.
The central bank is also watching whether rising consumer prices will affect its annual projection of 1.7 percent and its target range of 2.5-3.5 percent for price stability.
“We will provide any information of changes (in consumer prices),” Kim said.
Some market analyses claimed that the BOK might increase its key rate or even readjust its inflation forecast as inflationary pressure builds on the back of fiscal spending, rising public utility and transportation fees in Korea, and a global economic recovery led by the U.S.
A gradual phaseout of U.S. monetary stimulus, which is likely to trigger “transitory overreaction” by investors and volatility in the financial markets, is another factor that may affect the Korean economy.
Kim said the global financial markets would continue to react to the Fed’s retreat from an unorthodox monetary policy that has boosted liquidity over the years.
Although Korea had been effective in countering volatility through its prudent macroeconomic policy, the country must still prepare to buffer against any global shocks as its economy was highly prone to external macroeconomic conditions, the BOK governor said.
By Park Hyong-ki (
hkp@heraldcorp.com)
