BOK says its guard is up for more inflation

The Bank of Korea’s monetary policy board holds a meeting in central Seoul on Thursday. [NEWS1]

The Bank of Korea (BOK) highlighted the importance of raising interest rates at a time of high inflation to stabilize the country’s economy.

The central bank said on Friday that its analysis shows a rise in both cost-push and demand-pull inflation.

“If a central bank does not actively respond through monetary policy at times of intensifying inflation, the macro economy could be damaged in the mid- to long-term,” said the bank of the results of its analysis.

On Thursday, the central bank raised the base interest rate by a quarter percentage point to 1.5 percent, the second increase this year and the fourth in the current round of tightening that began in August 2021.

Rates were taken from an all-time low of 0.50 percent to 0.75 percent in August. That was followed by an increase to 1.0 percent in November and another to 1.25 percent in January.

Thursday's decision was made amid tightening of monetary policy in key countries. In March, the U.S. Federal Reserve upped the federal funds rate by 0.25 percentage points and indicated aggressive rate increases are coming.

Consumer prices in Korea were 4.1 percent higher in March than a year earlier, the highest increase in a decade. In the same month, consumer prices in the United States rose 8.5 percent, 7.5 percent in the European Union and 7 percent in Britain.

The BOK forecast inflation growth to accelerate once a relaxation of social distancing measures leads to greater consumer spending. The government announced Friday it would end all social distancing rules except the mask mandate starting Monday.

“Amid a rapid global economic recovery from expansionary economic policies in key countries," said the Bank of Korea Friday, "production disruption of core materials like those for semiconductors due to the spread of Covid-19 and a rise of international logistics prices,” Korea’s inflation faces upward pressure. It added that inflation expectations are also rising among the general public.

The Shanghai Containerized Freight Index (SCFI), an index of freight rates for container ships from Shanghai, has been on a rise over the past years. The rate on April 8 was 4,263.66, up 61 percent on year.

Energy and food prices have also been on a rise as the Russia-Ukraine war drove up wheat and oil prices. Korea heavily relies on imports for most of its energy needs.

Import prices rose 35.5 percent in March, the sharpest increase in nearly 15 years.

BY JIN MIN-JI [jin.minji@joongang.co.kr]