Rising oil prices feared to add to inflationary pressure


The Bank of Korea held the benchmark rate unchanged at 3.25 percent, extending the stand-pat streak to a ninth month, as its policy-decision panel sees no other enticing option.

Korea’s consumer prices rose 3.1 percent on-year in February, within the target band of the central bank, but went up 0.4 percent from the previous month amid growing concerns that inflationary pressure is already building up. 

The central bank’s policymakers seemed unable to switch to tightening due to concerns that high oil prices and the latest public fare hikes would add to the country’s inflationary pressure.

The BOK did not follow other countries such as Brazil either. They opted for a rate cut to bolster their economic growth at a time when downside risks remain at a worrying level in connection with the ongoing debt woes in Europe.

“A handful of countries including Brazil has slashed the benchmark rate but Korea is in a different situation,” Gov. Kim Choong-soo said at a news conference held on Thursday in Seoul. Brazil’s central bank on Wednesday cut the rate from 10.5 percent to 9.75 percent.

The rate freeze, which was widely expected by analysts, came after global oil prices hit $120 per barrel last month, a factor that could reignite worries over inflation growth.

Combined with higher oil prices, recent increases in public charges such as transportation fees are expected to send consumer prices going up again. The growth momentum of Asia’s fourth-largest economy is also likely to be swayed by the ups and downs of oil prices.

“Rising oil prices tend to have a strong impact on consumer prices and the economic growth,” Gov. Kim said.

Analysts said the central bank has its hands tied, finding no excuse to take a side between a rate hike and cut due to complicated and restrictive market conditions.

“The Bank of Korea clearly revealed its inability to take any action other than keeping the rate steady,” said Hong Jung-hye, analyst at Shinyoung Securities. “Given the latest signals, the central bank would keep the stand-pat position until the end of the year.”

The general elections in April and the planned reshuffle of members at the rate-setting panel at the bank appeared to have limited the options for the central bank further.

As for the replacement of half of the rate-setting members slated for May, Gov. Kim said he believed there won’t be any problem with the consistency of monetary policy. Market watchers, however, pointed out that the reshuffle might trigger a change in tone in the coming decisions.

By Yang Sung-jin (insight@heraldcorp.com)