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On August 10, 2006, the Bank of Korea, following a decision by the monetary policy
committee, lifted the overnight call rate by a quarter percentage point to 4.5 percent, the
highest since September 2001, in a bid to fend off the inflationary pressure, amid a great
concern about an economic slowdown.
Despite confidence that economic rebound is still underway, the central bank backed off
slightly from its previous position on the current economic conditions, stating that a
downside risk is still looming due to higher-than-expected oil prices. The governor of the
central bank said recent changes in the business environment should prompt the central
bank to consider a possible policy shift away from the tightening monetary mode that
began in October last year, hinting that the 4.5 percent rate is pretty close to a neutral
level set by the central bank, and that the series of interest rate hike may soon come to
end.
The move was not entirely unexpected, but some analysts and traders seen rather
surprised by the boldness of the monetary authority saying monetary policymakers are
probably still upbeat over the economic outlook by maintaining a tightening monetary
policy. The rate increase may also provide a greater leeway to the central bank in
pursuing its monetary policy if the economy enters a downturn any time. |
