By Kang Seung-woo
Korea’s annualized inflation at producers’ level rose to a two-year high in December last year due to a hike in raw material costs, providing another reason for the Bank of Korea (BOK) to raise its key rate.
The producer price index (PPI), a bellwether for future consumer inflation, gained 5.3 percent last month from a year earlier and up from 4.9 percent the previous month, according to the central bank. The figure was the fastest expansion since a 5.6 percent year-on-year gain in December 2008.
“Rising raw material prices, including oil costs, put upward pressure on the producer prices,” a BOK official said.
The soaring producer prices are another case for the BOK to raise its rate. This means a rare convergence of opinions by the central bank and the Strategy and Finance Ministry, which recently promoted a preemptive step to tackle the rising consumer prices.
The nation’s consumer prices rose 2.9 percent last year, but fresh food prices jumped 21.3 percent from the previous year, squeezing the livelihood of low-income people already hit hard by the global economic crisis, the government announced at the end of the year.
President Lee Myung-bak declared “war” on inflation last week in his first Cabinet meeting this year and the government plans to come up with price-stabilization measures on Thursday.
This year, the government has set its eyes on 5-percent economic growth, while keeping inflation at 3 percent.
Amid the government’s bid to curb escalating concerns over inflationary pressure, the market watchers expect that the BOK will raise its key interest rate in January or soon after.
The BOK is scheduled to hold a monthly monetary policy meeting to set the rate on Thursday.
“I think the BOK will have to increase the policy rate this month because of the rising inflationary pressure, affected by the current low rate,” said Cho Dong-chul, a state-run Korea Development Institute (KDI) School professor.
“From the beginning of the year, the Fair Trade Commission (FTC) has monitored inflation, but it is not the right way to control it.
“I think that the BOK balks at raising the rate on fears that a rate hike can further strengthen the Korean won against the U.S. dollar.”
The BOK raised the borrowing costs by a quarter percentage point in November, following a three-month freeze, in a bid to fight inflation. It also hiked the rate from a record low of 2 percent in July, the first rate increase since February 2009.
“Entering 2011, the government’s economic policy is focused on getting inflation under control,” a Seoul-based economist said.
“The inflation rate is likely to near the BOK’s target in the first quarter of the year and asset prices are likely to become volatile, so the possibility of a rate hike cannot be ruled out.”
A global investment bank said that the key rate will be kept on hold at 2.5 percent this month.
“Our base call is that the BOK will keep rates unchanged at 2.50 percent at its Jan. 13 meeting, waiting for two more months before hiking it by 25 basis points to 2.75 percent in April,” Nomura Securities economist Kwon Young-sun said in a research note.
“However, with public anger over inflation, we see an increasing risk that the BOK may be forced to raise the rate in January, but our concern is that the effectiveness of any rate hike would be largely limited by foreign exchange intervention, the government’s ambitious economic growth target and stimulus policies for the property market.”