The central bank’s commitment to putting inflationary pressure under control sounds credible at long last. It sounds convincing not because it hints at another benchmark rate hike next month after a 25-basis-point increase to 3.25 percent last weekend. Rather, much of the credibility comes from the administration, which promises to take all measures possible to rein in inflationary pressure.
Friday’s 25-basis-point raise was the latest of five baby steps taken since July last year. Still, few would say that the Bank of Korea has been active in its fight against inflation. On the contrary, the central bank, in making changes in its monetary policy, has been regarded as beholden to the administration, which has until recently maintained a growth-first policy.
The central bank’s Monetary Policy Committee appeared to be taking its cue from the administration, as it has been suspected of on numerous occasions in the past, when it decided to raise its benchmark rate last Friday. Such suspicions were bolstered by circumstantial evidence, though the central bank’s governor denied it vehemently.
Before the monetary policy decision was announced, the new minister of strategy and finance was presiding over a ministerial-level conference on price stability. Reaffirming his predecessor’s recent change in the long-held growth-first policy, he said the administration would “exploit all means possible to stabilize prices.”
At a news briefing, the governor said the central bank took preemptive action by raising the rate because pressure on prices was expected to remain high. But the rate increase came too late to be preemptive. The central bank had kept the rate intact during the previous two months, even though the consumer price index remained above the 4 percent level, the upper limit of the central bank’s target range. Inaction had undoubtedly fueled inflationary expectations.
The governor said the central bank was considering another rate increase next month, adding that various factors would be taken into account in making a final decision. But he was hedging too much for his words to sound reassuring. He needs to be more resolute in his speech and his actions if he wants to make his anti-inflation fight look convincing.