Inflation target range widened to between 2-4%

The Bank of Korea said yesterday that it widened the inflation target range to between 2 percent and 4 percent for the next three years, a move seen as providing room for the central bank to keep the status quo on low interest rates.

BOK Governor Lee Seong-tae and his fellow monetary board members set the inflation target for 2010-2012 at 3 percent, with a margin of plus on minus 1 percentage point.

"The widened tolerance range is reflecting an increased uncertainty in price factors," BOK official Shin Woon told reporters. "It does not mean a change in the monetary policy stance."

The BOK also changed the way it evaluates the performance of the inflation target on an annual basis from the current three-year average basis.

"This will allow us to cope with inflation factors more flexibly, with a wider and longer vision," he said.



Experts said the widened inflation target band - the raised upper bound in particular - will give more scope for the central bank to keep the interest rate at the current record-low level.

"The BOK will likely find it more difficult to justify pre-emptive normalization of record low interest rates," Kwon Young-sun, senior economist at Nomura in Hong Kong said in a note. "An inflation target with a higher upper bound could add to risks that the BOK moves too late."

Earlier this month, the BOK left the seven-day repurchase rate unchanged at 2 percent for the ninth month. It slashed the benchmark rate by a total of 3.25 percentage points between October 2008 and February 2009 in a bid to put the brakes on the local economy`s sharp contraction. The BOK will meet Dec. 10 to review the rate.

Nomura pushed back its forecast for the first rate hike from January to June, and said that could require more rapid rate hikes in the second half of next year to quell inflation expectations and ease asset price inflation.

"The new inflation target could be taken as a signal for no action (on interest rates), which is contrary to what the BOK had hinted few months ago," said Oh Suk-tae, economist at SC First Bank.

BOK Governor Lee has hinted previously that an interest rate hike may be near and the rate may move by more than 0.25 percentage point.

Korea`s inflation rate remained below the central bank`s target for a fifth month in October as gasoline prices dropped. Market participants and economists have been watching closely for hints on when The BOK would start raising the rate, as Korea`s economy makes a faster-than-expected recovery.

(milaya@heraldm.com)



By Lee Sun-young