Low rate, price rises emerging as toxic cocktail for inflation

By Kim Jae-kyoung

Staff reporter

The specter of inflation is steadily stalking South Korea, as pressure is building at a rapid pace due to a toxic cocktail of an increase in import prices and protracted low interest rate policies.

Policymakers have joined forces to issue warnings against inflation, a move that is seen as an attempt to pave the way to unwind stimulus steps taken to minimize the economic downturn following the global financial crisis.

Strategy and Finance Minister Yoon Jeung-hyun said Monday that the government will pursue balanced economic policies in the second half of this year.

"We will manage economic policies in a way of keeping inflation in check while maintaining a pace of economic recovery," he said at a meeting with heads of economic think tanks.

His remarks came after the Bank of Korea (BOK) reported Monday that the prices for imported goods jumped 2.7 percent in May month-on-month, the biggest monthly rise since they grew 5.1 percent in June 2009 and the fourth consecutive month of increases since February.

Import prices soared 11.3 percent year-on-year, with the cost of raw materials skyrocketing 26.2 percent. It marked the highest monthly gain since February last year.

Given that import prices translate into consumer inflation in two to three months, it is highly likely that consumer prices will increase in the coming months, emerging as the biggest hurdle to complete economic recovery.

What is of greater concern is that the weakening of the local currency and high-flying oil costs will add to inflationary pressure down the road. The Korean won lost 43.6 won to close at 1,246.10 won against the dollar Friday from the end of May.

Inflation from China, dubbed as "Chinaflation," is another factor that is likely to push up consumer inflation. China is now facing strong inflationary pressures due to a wave of wage hikes in companies across the country. China's consumer inflation accelerated to 3.1 percent year-on-year in May from 2.8 percent in April.

Growing attention on the increase of inflation is likely to give more leeway for the BOK to hike key interest rates. The central bank has kept the policy rate untouched at the record low of 2 percent in June for the 16th consecutive month.

At a press conference following the June monetary policy committee meeting Thursday, BOK Governor Kim Choong-soo warned against inflation, signaling that a rate increase is in the offing.

"Upward pressure on inflation is expected to gradually mount in the second half as the economic recovery gains momentum," he said.

Earlier, the BOK said in a statement that it will manage its monetary policy in a way that the economy can maintain its solid growth on the basis of price stability, hinting that the central bank is tilted more toward a potential rate hike from the previous month.