Will A Major Asian Central Bank Make A Huge Policy Blunder Tomorrow?

Tomorrow the Bank of Korea meets and is expected to continue its tightening program, raising rates by another 0.25%, according to Societe Generale’s Takuji Okubo.

The reason is inflation in the country has been above the bank’s 4% annualized limit for two months consecutively. But where is this inflation coming from?

From Takuji Okubo:

First of all, underlying inflation in South Korea is still commodity-price intensive. While the acceleration in core CPI inflation to 3.1% is alarming, we think the “core” CPI includes significant commodity elements. For example, prices for “eating out” are a part of “core” CPI, but rises in food prices are likely to be the main reason for the surge in these prices. In our judgment, inflation in South Korea has still not become general price inflation, such as one driven by wage inflation.

A rate hike can’t really quell increases in food prices, especially in a country that imports large amounts of food from the United States, Australia, and China, all of which have seen weather impact crop output.

And the country is faced with an oil price shock that is already going to hit the KOSPI, and some of the country’s main industries.

So while Korea’s spiking CPI is a concern, there’s no proof a rate hike will solve the problem.

Don’t miss: Why Ben Bernanke thinks it’s a bad idea to hike rates to fight commodity price shocks >


Photo: Societe Generale

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